October 11, 2005, Wall Street Journal — A bearishly inclined bond market could face an acid test this holiday-shortened trading week when inflation data are published Friday. The threat of rising consumer prices amid still-high energy prices is a topic of major concern among Federal Reserve policy makers. Tough-sounding speeches on inflation by Fed officials in recent weeks have increasingly convinced bond investors that the current 3.75% federal funds rate will reach 4.25% by the end of the year and possibly move to 4.5% or higher early in 2006. The 10-year note was yielding 4.36% after an early close Friday, up from 4.33% the previous week. Notably, the 10-year yield failed to sustain a bearish break above 4.42% early Friday in the wake of the September U.S. employment report, which showed a much smaller decline in payrolls than expected. “Inflation is now the primary focus of the bond market, and next Friday could well prove more important than the payroll report was for the near-term direction of yields,” said market and that is resonating with longer dated maturities,” said Kevin Flanagan, fixed-income strategist at Morgan Stanley in Purchase, N.Y.
Credit Markets [Wall Street Journal]


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