The US Fed raised both the Fed Funds Rate and the Discount Rate 1/4% to 5.5% and 5% respectively yesterday. The bond market spiked upwards immediately on short covering but then sold off sharply as market participants honed in on the Fed shifting its bias on rate policy to neutral from a bias toward higher rates. The tone of the Fed's statement indicates that further tightening will probably be needed eventually. Traders are now focusing on inflation fears if the Fed lets down their higher rate policy .
The next 2 Fed meetings are Dec.15, 1999 then February 1, 2000. No one is expecting any policy change for the worse right before the new year, the talk is actually that cash will be readily available for those fearful of a Y2K banking catastrophe waiting to put everything they own under their mattress. Adding to reasons for the sell off was Oil hitting 3 year highs up 57 cents to $25.70 and more inflation fears.
In the midst of it all the Province of Ontario brought a new deal $500MM deal yesterday at the worst timing possible, as traders were already hiding underneath their desks after the hike awaiting the other shoe to drop if the bank of Canada's moved. The issue was a 6.2% Nov-19-09 +28.5 over Canada bonds of equal maturity.
The BOC will issue its semi-annual monetary policy report at 10:00 a.m. Wednesday to provide its economic growth and inflation forecasts into the year 2000. The Bank of Canada finds itself in a tough spot as its semi-annual report on monetary policy is due out this morning. Canada still has an economy on fire but the costs of servicing it and the huge debt load outstanding both federally and provincially will mean they will try to keep rates as low as the can without risking inflation. Today the bank of Canada raised its Bank Rate by ¼ of one percentage point to 5 per cent. The operating band for overnight interest rates was correspondingly increased, and the Bank's target for the overnight rate is now 4¾ per cent .
10-YEAR BENCHMARK YIELDS
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