Bonds rose sharply Friday following a report showing inflation declined last month, raising expectations by bond analysts that interest rates will drop soon.
The Treasury's bellwether 30-year bond shot up 1 5/32 point, or $11.56 per $1,000 in face amount, at closing. Its yield, which moves in the opposite direction from price, dropped to 8.15 percent from 8.25 percent late Thursday.The Labor Department said its Consumer Price Index fell 0.1 percent in March, the first decline in five years. The fall followed a 0.2 percent February rise and a 0.4 percent advance in January.
All week, bond strategists predicted the Federal Reserve would cut interest rates if the Consumer Price Index showed moderate inflation. The bond market began to rally after release of the inflation report.
High inflation tends to erode the value of fixed income securities such as bonds. Low inflation makes bonds worth more.
Throughout the day, the Fed provided no clear signal to the market about its interest rate intentions, said Brian McDonald, a bond and futures trader for the California-based Capital Insight Inc.
Despite the Fed's ambiguity, economists are virtually unanimous in their belief that an interest rate cut is inevitable. That perception, combined with technical factors in the market, provided the fuel for the market strong afternoon rally, analysts said.
The federal funds rate, a key indicator of interest rates, was quoted at 5 percent at closing, down from 55/8 percent Thursday. Raymond Dalio, president of the Connecticut-based Bridgewater Associates Inc., said the relatively low federal funds rate was not a result of any explicit Fed policy shift.
The perceived target of federal funds, the interest on overnight loans between banks, is supposed to be 6 percent. Dalio said federal funds were trading lower because of the market's short-term expectations of lower interest rates.
In the secondary market for Treasury bonds, short-term maturities rose between 3/32 point and 1/4 point, intermediate maturities rose between 3/8 point and 3/4 point, and long-term issues were up between 1 3/32 point and 1 9/32 point, the Telerate Inc. financial information service reported.
The movement of a point equals a change of $10 in the price of a bond with a $1,000 face value.