U.S. Credit Markets: Bond Market Could Slow After an Active Week; Coming Economic Data Are Unlikely to Move Fed, Resulting in Placid Trade
Amid a climate of optimism, bond investors expect economic data this week to do little to determine the Federal Reserve's next step for monetary policy.</br></br>That should make for a week of calm trading, in contrast to last week, which proved an important period for bond-market participants. Fed Chairman Ben Bernanke spent Wednesday and Thursday testifying before Congress about the central bank's outlook for the economy and monetary policy. He told legislators he expects growth to moderate, and while he is concerned by the recent flare-up in price pressures, he expects the reduced momentum to keep inflation in line. The chairman also stuck to a familiar refrain regarding monetary policy: where interest rates go next is a function of how the economy performs, he said.</br></br>Bond traders responded to Mr. Bernanke's comments by pushing prices higher. The federal-funds futures market cut back odds to a less-than- even chance that policy makers will drive what is now a 5.25% overnight target rate to 5.5% at the Aug. 8 Federal Open Market Committee meeting. A survey of major bank economists by Dow Jones Newswires found a majority of the forecasters reckon the Fed will raise the rate then, after which the funds rate will hold steady through the remainder of the year.</br></br>Late Friday, the 10-year Treasury note's yield stood at 5.047%; the two-year yield was at 5.084%. The gap between yields on the two- and the 10-year note, the benchmark yield curve, was a negative 0.03 percentage point.</br></br>Reduced fear of future rate increases is a positive for Treasury prices, particularly for the short end, which is the most sensitive to changes in official rates.