Reply #18: Bond traders turn to 1994 for rate clues [View All]

[54anickel]

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1079420569772

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This week, 10-year Treasury yields hit their highest levels in nearly eight months after Alan Greenspan, chairman of the Federal Reserve, referred to companies regaining pricing power - a comment the markets took as signalling rising inflation.

The 10-year yield reached 4.5 per cent after the comments, up almost a percentage point from the eight-month lows it touched last month. Yesterday, following unexpectedly robust durable goods orders, the two-year yield rose above 2.2 per cent for the first time in 18 months.

Federal Reserve officials, including Mr Greenspan, are on record saying that interest rates must normalise from their historically low levels. As a rule of thumb, a neutral level for the Fed funds rate is considered to be about 2 percentage points above inflation. With core inflation running at about 1.5 per cent, this would involve the rate moving from 1 per cent to about 3.5 per cent - a similar move to that seen in 1994.

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