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US bond yields slashed on hopes of 75-point rate cut
By Brian Hale in New York
US financial markets expect another globally pace-setting interest rate cut of up to 75 basis points from the US Federal Reserve - with a move possible before Wall Street sharemarkets resume trading next week.
Prospects for a big fall in the most widely watched indices grew again yesterday as resistance to higher bond prices weakened towards the close of resumed bond market trading.
Resistance to higher prices, and lower yields, was evident throughout most of the session as the US Treasuries market became the first US market back on the air after Tuesday's terrorist attack.
Prices and yields were closely in line with expectations announced by the major investment banks of yields falling to 3.10 per cent on two-year notes from 3.45 per cent before Tuesday's disaster, with the 10-year Treasury yield falling to 4.71 per cent from 4.75 per cent.
There also was further verbal support from Wall Street with a number of industry figures insisting that Wall Street had a moral obligation to help avoid any sell-off and that "no-one should try to make a buck on this".
But prices accelerated higher in the final two hours with the yield on two-year notes falling to 2.98 per cent; the five-years dropping to 3.93 per cent and the 10-years dipping to 4.63 per cent.
Bond prices were expected to soar with yields falling dramatically as funds fled already fallen sharemarkets to the relative safety of US Government securities. But the tumble in short-term interest rates to much lower than expected levels was read by some market observers as indicative of a big fall in equity prices when trading resumes.
Others were more hopeful, even though the gains sank two-year note yields to their lowest level since 1958, when Dwight Eisenhower was president. They said that many market participants were not really participating - including the stricken Cantor Fitzgerald firm, which accounted for almost a quarter of all US bond trading before Tuesday.
More than two-thirds of the firm's 1,000 employees were at work on Tuesday on four floors of the World Trade Centre above the 100th level and all are said to be missing. The firm said it resumed trading yesterday from its back-up site in New Jersey, but other traders said they could not get bids and offers from Cantor.
But some traders predicted further falls in Treasury yields if the US economy falls into recession in the wake of the attack and the US Federal Reserve cuts interest rates further. Futures markets yesterday shifted to pricing in an 85 per cent chance that the Fed will slash its Fed funds target rate before the end of October by 75 basis points to just 2.75 per cent - the lowest in 30 years.
Before Tuesday's terrorist attack, the Fed funds futures market was pricing in a 25 basis point cut at the Fed's October 2 meeting. The market is now pricing in a 60 per cent chance of a rate cut before the meeting.
Sentiment yesterday was not helped by further signs that consumer confidence was flagging further before Tuesday, threatening the only support for the US economy. Consumer confidence fell to an 8-year low in September, according to the latest survey from the University of Michigan survey which was conducted before the attacks.
The survey's preliminary index of consumer sentiment fell to 83.6 from 91.5 with expectations for the coming months falling to 77.2 from 85.2.
-- Martin Thompson (email@example.com), September 14, 2001