Bonds jump on words from Gross

[notiCIas]

Bonds jump on words from Gross

Respected investor says Fed may ease rates soon; talk of limited 30-year issuance.

June 21, 2005: 4:58 PM EDT

NEW YORK (CNN/Money) - Treasury bond prices jumped Tuesday afternoon after Bill Gross, a widely followed bond investor, said the Fed may cut interest rates soon and a Treasury official put a number on a possible 30-year issuance that traders found modest.

The dollar fell against the euro and yen.

The benchmark 10-year note added 18/32 of a point to 100-22/32 to yield 4.03 percent, down from 4.09 late Monday, while the 30-year bond gained 1-4/32 points to 116-5/32 to yield 4.32 percent, down from 4.37 the previous session. Treasury prices and yields move in opposite directions.

The five-year note rose 9/32 to yield 3.82, while the two-year note climbed 1/32 of a point to yield 3.68 percent.

Gross, chief investment officer at PIMCO, told a Morningstar Inc. investment conference that he thinks the Fed may let up on interest rate increases in August after they reach 3.5 percent.

"Central banks don't rest at one rate for long," he said, according to Reuters. "If only to impart a bid to the U.S. housing market, they (the Federal Reserve) may have to start cutting again as early as the end of the year."

The Fed has raised official rates by two percentage points in the last year, bringing the benchmark federal funds rate that banks charge one another for overnight loans to 3 percent.

The easing of interest rates is a sign that the Fed believes inflation is under control. Inflation hurts bonds as it erodes the value of the fixed interest-paying investment.

Adding to the bond rally Tuesday were remarks from a Treasury official that the government may issue $20 to $30 billion annually in 30-year bonds.

Traders said that amount could easily be absorbed by the market, according to Reuters.

The Treasury said in May it was thinking about bringing back the 30-year bond, which it suspended in 2001. Since then, the market has been more or less certain that the bond would return, just not sure to what extent.

Record oil prices also chipped in, as traders bet the high cost of energy would dampen economic growth and stifle inflation.

"Oil is definitely a factor," Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co. in Seattle, Washington, told Reuters. "People are concerned about its impact not just on growth here, but on global growth."

In currency trading, the dollar reversed gains against the euro, with the euro buying $1.2183, up from $1.2142 late Monday.

The dollar also slid against the yen, buying ¥108.23, down from ¥109.39 late Monday.

Reuters said renewed speculation that China would soon revalue its currency was fueling the yen.