Bond Traders Now See the Fed as Unlikely to Cut Rates

Includes: SHY, TIP
by: Jonathan Liss

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AHEAD OF THE TAPE: Long Walk Back [Wall Street Journal]

Summary: A few weeks ago Wall Street odds were that the Fed would cut short-term interest rates between now and next March; now bond investors think the Fed will not cut rates, and may even begin raising them again by 2007 to battle inflation. The pervasive thinking now is that the economy will not need much help from the Fed, making cuts in the 5.25% federal-funds rate are unlikely. The coming week's events will play a big role in shaping the bond market's next move: Fed Chairman Ben Bernanke delivers a speech today, and a Labor Department report is due later in the week on new consumer and wholesale price inflation data. There are expectations the Labor Department data will keep the Fed cautious about the inflation outlook, which could push yields on Treasury bonds higher.
Related links: The Case for Bonds, and the Problem With Bond ETFsWill Bond Yields Continue Falling, Spurring a Soft Landing?Bill Gross: Bond Prices Have BottomedPhilly Fed Chief Believes Fed May Have to Reraise Rates in the Near Future
Potentially impacted stocks and ETFs: iShares Lehman 1-3 YR Treasury Bond (NYSEARCA:SHY), iShares Lehman TIPS Bond (NYSEARCA:TIP).

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