Bond yields fall as US recession fears grow

Bond yields staged their biggest decline in more than a month on Wednesday as fears grew that weakness in the US housing sector would lead the nation into recession.

Construction companies broke ground on the fewest new houses in 14 years last month, according to data released on Wednesday, and a Federal Reserve survey showed economic growth across its 12 regional districts slowing amid tighter consumer lending standards.

The continuing risks posed by the housing downturn and the credit crunch and the ensuing deceleration in activity across a number of districts increase the odds of the Fed cutting rates in October,” said Drew Matus, economist at Lehman Brothers.

Investors fled to the safety of government debt, pushing the yield on three-month Treasury paper down 25 basis points to 3.99 per cent. The yield on the two-year note fell 14bp to 3.98 per cent. Expectations that the Fed will cut rates by a quarter percentage point later this month rose back above 50 per cent.

The move in bond yields is based on signs of accelerating stress in the housing sector,” said William O’Donnell, strategist at UBS. The indirect effects of the housing slowdown are becoming more noticeable in other parts of the economy.”

Housing starts fell 10 per cent and applications for building permits declined to the lowest level since 1993, indicating further weakness ahead. Building permits fell by the most since 1995, sliding 7.3 per cent to an annual rate of 1.226m.

In its Beige Book survey of economic conditions, the Fed found the pace of growth decelerated” in September and early October as consumer spending slowed. The Fed noted that amid the ongoing decline in housing, in some instances, buyers could no longer secure financing.”

The dollar slid amid fresh fears that a housing downturn would slow the economy.

Core consumer prices, excluding volatile food and energy costs, rose 0.2 per cent for the fourth consecutive month, the government said, while rising energy costs pushed headline inflation to 0.3 per cent.

Jeoff Hall, economist at Thomson Financial, said moderate core inflation, combined with the steep fall in housing construction, would trigger debate between Fed policymakers who were more worried about rising prices and those anxious to limit damage to growth.


Bond yields fall as US recession fears grow

Financial Times
10/17/2007 4:42:34 PM