Good news on the interest rate front

My opinion was the Feds have tightened too much already- maybe we will see some more real estate market activity.


U.S. Treasuries Gain After Bernanke Says `Moderation' Under Way
July 19 (Bloomberg) -- U.S. 10-year note yields fell the most in six weeks after Federal Reserve Chairman Ben S. Bernanke said ``moderation'' is under way in the economy, fueling speculation the bank will pause in lifting interest rates.

Traders bought Treasuries as Bernanke, in testimony to Congress, said policy makers must take into account ``the possible future effects of previous policy actions,'' while also remaining on guard against inflation. Treasuries fell earlier after a government report showed consumer prices excluding fuel and food rose in June by more than economists forecast.

``More people are betting on the notion that the Fed may be pausing sooner rather than later,'' said David Glocke, who manages $30 billion in Treasuries for Vanguard Group Inc. in Malvern, Pennsylvania. ``I would have anticipated a little more focus on the inflation front but there's more real estate devoted to the slowing in the economy.''

The yield on the benchmark 10-year note dropped about 8 basis points, or 0.08 percentage point, to 5.05 percent at 2:07 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It was the biggest drop since June 2. The two-year note yield fell about 8 basis points to 5.10 percent.

The price of the 5 1/8 percent note due May 2016 rose 5/8, or $6.25 per $1,000 face amount, to 100 17/32. The note's price moves inversely to its yield.

Growth Outlook

Gross domestic product, which expanded at an annual rate of 5.6 percent in the first quarter, will probably cool to grow from 3.25 percent to 3.5 percent this year and 3 percent to 3.25 percent next year, according to Fed forecasts published today.

``Investors are looking at the economic outlook and changing their opinions on the marketplace,'' said Richard Volpe, head of U.S. government bond trading at Bear Stearns & Co. in New York. ``If you look at the forward assumptions in the economic outlook they were weaker than we anticipated.''

Treasury trading volume surged today, according to data from ICAP Plc, the world's largest broker of trades between banks. Volume was $290.5 billion as of 2 p.m., approaching the amount for the full day yesterday when it reached $293 billion, which was the most since June 14, and above the six-month average of $253 billion.

The Fed next sets rates on Aug. 8. Interest-rate futures showed traders see a 59 percent chance the Fed will lift rates a quarter-percentage point to 5.5 percent next month, down from above 80 percent odds after the consumer price report. The Fed has lifted borrowing costs at its past 17 meetings.

Bearish Bias

Investors in Treasuries were the most bearish in three weeks in the week through July 17, according to a JPMorgan Chase & Co. index released yesterday.

Bernanke said policy makers must be on guard against ``persistently higher inflation.'' At the same time, the Fed doesn't want to ``tighten too much,'' he said in his testimony.

The Labor Department said consumer prices rose 0.2 percent in June, after a 0.4 percent increase the month before. The median estimate of economists surveyed by Bloomberg News was for a 0.2 percent jump. Excluding food and energy, prices rose 0.3 percent, the same as May, and beating the median forecast for a 0.2 percent increase.

Goldman, Sachs & Co. economists today raised their forecast for the fed funds rate a quarter-percentage point to 5.5 percent, saying today's inflation report and remarks from Bernanke make it less likely policy makers will pause.

Less Aggressive

Investors interpreted the Fed chairman's remarks as less aggressive on raising interest rates, said Don Alexander, director of fixed-income and currency strategy in New York for Citibank Private Bank, which manages $222 billion.

``The Fed may need to do something more. But maybe not as much as people had thought,'' said Alexander. ``He's not coming through as very aggressive about raising rates.''

Two-year Treasuries yielded about 5 basis points more than 10-year notes, according to Bloomberg data. This so-called inversion of the yields may indicate that traders believe the economy will slow, and the Fed may be forced to cut interest rates.

Ten-year yields fell as low as 5.04 percent on July 14 amid escalating violence in the Middle East.

Losses earlier today were also tempered by a report showing U.S. homebuilders started work on fewer homes in June.

Housing starts fell 5.3 percent to an annual rate of 1.850 million, the Commerce Department said. Building permits, a sign of future construction, fell 4.3 percent to a 1.862 million rate, a three-year low.

``The housing numbers may be a typical example of where the Fed goes a little too far'' raising rates, said E. Craig Coats Jr., co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York.



To contact the reporter on this story:
Michael McDonald in New York at
mmcdonald10@bloomberg.net;
Deborah Finestone in New York at
dfinestone@bloomberg.net.