More On Expectations

Obviously there is a kind of 'double bind' dimension to Fed policy making at the moment. Richard Berner was rightly congratulating them last week for 'bringing us in on the conversation', the trouble is once we're 'in' we may feel we want to draw our own conclusions. Judging by movement in Treasury bonds, some people are already drawing the
conclusion that deflation is here to stay. This was not what the Fed had in mind.

The yield on 10-year U.S. Treasuries was testing a record 45-year low in Asian trade on Thursday, supported by poor U.S. data and expectations that the Fed will keep interest rates low.Treasuries have rallied sharply since the Fed warned last week that the economy was in danger of a further decline in inflation or even deflation -- when prices across the economy fall. On Wednesday, helped by poor U.S. retail sales data for April, the yield on the 10-year bond fell to its lowest since 1958. Retail sales excluding autos showed an unexpected fall of 0.9 percent, the biggest since just after the September 11 attacks. "I think this trend will continue for a while," said Akihiro Nishida, senior economist at Mitsubishi Securities. "Economic data has been weak and the Fed's warning is having a great impact on the market." As of 0219 GMT, the benchmark 10-year Treasury note US10YT=RR was at 100-29/32, yielding 3.51 percent, compared with late New York's 100-27/32 yielding 3.52 percent. It hit a 45-year low of 3.51 percent in New York trade. Thirty-year bonds US30YT=RR , though no longer issued by the Treasury and thus prone to exaggerated swings, were at 113-19/32 yielding 4.51 percent, flat from late U.S. levels. During U.S. trade the long bond hit 4.50 percent, the lowest since the securities were first issued in the early 1970s.
Source: Reuters News
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