Bonds extend losses
Treasurys under pressure after economic data keep rate fears alive
February 16, 2000: 9:13 a.m. ET

NEW YORK (CNNfn) - Treasury bonds extended earlier losses Wednesday after a government report showing surprising strength in the housing market gave the Federal Reserve one more reason to hike interest rates ahead.

Analysts said news form the Commerce Department that housing starts rose to an annual rate of 1.78 million last month suggest the Fed's four interest rate hikes since June have failed to slow the economy.

"Everybody expects the economy to slow down," James Smith, chief economist at the National Association of Realtors, told CNNfn's Before Hours. "But the question is when is it going to slow down."

As such, Smith says interest rates are headed higher.

In further evidence the housing market remains buoyant, housing permits rose 8 percent to an annual rate of 1.76 million in January.

Just before 9:10 a.m. ET, the price of the 30-year bond fell 16/32 to 99-18/32. Its yield, which moves inversely to its price, rose to 6.28 percent from 6.24 percent Tuesday. The yield on the 10-year note rose to 6.57 percent from 6.55 percent Tuesday.

Analysts said the response to the data might have been muted as traders reserve most of their focus for the week's upcoming inflation data and testimony from Fed Chairman Alan Greenspan.

The Labor Department is scheduled to report on January producer prices Thursday, and data on last month's consumer prices comes Friday. U.S. international trade deficit data, meanwhile, is released Friday.

But before then, Greenspan delivers his semiannual Humphrey-Hawkins testimony to Congress Thursday. His words will be closely watched for clues on whether the strengthening economy needs to be slowed by tightening credit.

In a note to clients Wednesday, Donaldson Lufkin & Jenrette said the remarks should reinforce the market's belief that the Fed will raise rates in March.

The Fed tightened credit four times since June, bringing its main lending rate to 5.75 percent. But higher rates have not appreciably slowed the economy. Consumer spending remains strong, unemployment is at a 30-year low and the Nasdaq composite index is trading just below a record high.

Still, rising crude oil prices, which this week jumped above $30 a barrel for the first time in since January 1991, have failed to hurt bonds. The gains should mean higher gas prices and heating costs, bringing the specter of rising inflation, which erodes a bond's value.

In the morning's other economic indicator, January export prices excluding agriculture rose 1 percent in January. Import prices excluding oil fell 0.1 percent.

DDollar Mixed

The dollar rose slightly against the euro Wednesday but was little changed versus the yen.

Just before 9:10 a.m. ET, the euro rose to 98.02 cents from 98.14 cents Wednesday. The dollar traded at 109.09 yen, down from 109.10 yen Tuesday.

Analysts linked the morning's lack of action to the dollar's inability to break above key trading levels.

"The Dollar/Yen remained hemmed in narrow ranges as traders were unsuccessful in their attempts to push the dollar through key technical resistance," said Alex Beuzelin, market analyst at Ruesch International.

Still, the dollar has generally climbed against the major currencies this year, as the U.S. economy continues to outperform its overseas counterparts. The U.S. gross domestic product, for example, rose 5.8 percent in the fourth quarter, far surpassing the growth rate in Europe and Japan.

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-- Farouk Madjurian (fmadjurian@hotmail.com), February 16, 2000