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Europe derails bond gains
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July 15, 1999: 3:27 p.m. ET
Treasurys abandon CPI cheer as rate concerns drive eurobonds into retreat
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NEW YORK (CNNfn) - Treasury bonds swung to the close of a roller-coaster session almost unchanged Thursday, as the tension between benign economic data and a weakening European bond market ended in near stalemate.
Shortly before 3 p.m. ET, the bellwether 30-year Treasury bond was up a scant 1/32 of a point in price at 90-25/32, having wobbled in a wide swing over the course of the day. The yield, which travels in the opposite direction, eased to 5.90 percent.
Traders said the bond had initially surged in response to benign consumer price index (CPI) and jobless claims reports released mid-morning, only to retreat again after interest-rate speculation sent European bonds on the run.
As the chief factor on the bond market's bullish side, the headline CPI figure came in unchanged for the second month in a row in June, indicating that retail inflation remains nearly nonexistent. Bond traders had braced themselves to see an upturn of 0.1 percent.
Excluding the volatile energy and food sectors, the CPI rose only 0.1 percent, tamer than the 0.2 percent increase investors had expected.
Bond traders' enthusiastic reaction to the data was a bullish contrast to Wednesday, when bonds retreated following the release of a similarly inflation-negative producer price index (PPI) reading for June.
Traders said Thursday the Treasury debt market already had factored in the PPI in the form of the Argentine safety bid earlier in the week, but the CPI data were a surprise worthy of more extended buying. Bonds soared Monday after rumors that Argentina would default on its overseas debt unhinged Latin American financial markets and spurred a flight to the stability of Treasury bonds.
Jobless claims data issued at the same time as the CPI gave bonds additional backbone. According to the Labor Department, initial jobless claims -- a key indicator of layoffs and, more generally, competition for jobs or workers -- climbed to 310,000 from a revised 294,000 in the past week, a pleasantly better-than-expected result for investors looking for a smaller increase to 295,000.
Federal Reserve Chairman Alan Greenspan and others have warned that broad inflationary forces most likely will return to the U.S. economy through the labor market as the number of available positions grows, forcing employers to raise wages to attract workers. Thus, a large number of jobless claims relieves inflation-wary investors by showing that some slack remains in the job market.
Rumbles in Europe
Despite the encouraging data, bonds spent much of the session wallowing in negative territory in sympathy with sliding European bond markets.
German government Bunds and other euro-denominated debt retreated following comments from European Central Bank (ECB) Governor Wim Duisenberg that seemed to indicate higher European interest rates ahead. Duisenberg said Thursday a "reassessment" of the ECB's currently loose interest rate policy could be "appropriate" in the foreseeable future.
Speculators took the remarks as a sign that European rates were back on an upward track after months of worry that another interest rate cut was on the agenda. Euro-denominated bonds have thrived in the comparison between Europe's loose rates and the likelihood of rising U.S. rates, a comparison itself rooted in the contrast between the sluggish European economy and robust U.S. expansion.
The euro, which has suffered from the comparison, regained its balance on the news to trade at $1.0204, edging up from its previous close of $1.0201.
The dollar remained subdued against the yen, crawling up to 120.83 yen following a "secretive" round of overnight greenback buying on the part of the Bank of Japan (BOJ).
Japanese monetary authorities repeatedly have warned against a strong yen as being detrimental to their nation's tentative economic recovery. A strong yen would starve Japan's crucial manufacturing sector of export revenue, leaving overall inflows depressed.
Thursday's intervention, in which the BOJ stepped into the currency market to buy dollars at inflated prices, was the seventh in slightly over a month. 
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