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June 6, 2000

Treasurys Drift Lower As Market Seeks More Clues To Fed Policy
By Dow Jones Newswires

Straight from the Horses Mouth...Weiss comments

NEW YORK - Treasurys were slightly lower early Tuesday. The government left its estimate of first-quarter nonfarm productivity unrevised, which was generally expected.

Shortly before 9 a.m. EDT, the 10-year note was down 5/32 at 102 16/32, pushing its yield, which moves inversely to the price, up to 6.144% from 6.122% late Monday. The 30-year bond fell 7/32 to 104 13/32, yielding 5.929%, up from 5.914% late Monday. The two-year note slipped 1/32 to 100 7/32, yielding 6.504%.

In its final estimate of first-quarter labor productivity, the Labor Department reported that nonfarm business productivity rose at an annual rate of 2.4% between January and April, unchanged from the preliminary estimate but down sharply from the 6.9% rate in the fourth quarter.

Though unrevised, productivity still was the weakest since the second quarter of 1999. Unit labor costs rose at an annual rate of 1.6% during the first quarter, down from the initial estimate of 1.8% but still the biggest increase in nine months.

The nonfarm-productivity report is considered among Federal Reserve Chairman Alan Greenspan's key indicators. The Fed has worried that as productivity gains dwindle, a key buffer against inflation is being whittled away.

While many traders remain hopeful that the economy is slowing and the Fed won't have to raise interest rates later this month, policy makers are cautious.

Jack Guynn, the president of the Federal Reserve in Atlanta and a voting member of the Federal Open Market Committee, said Monday that he believes the economy "remains vulnerable" to inflation because of increasing prices in certain sectors.

And Dallas Federal Reserve President Robert McTeer said of Friday's employment data, which showed a rise in unemployment, "you can't read too much into one month's jobs report."

Market players will monitor comments from other Fed members. San Francisco Federal Reserve Bank President Robert Parry and Fed Governor Laurence Meyer are scheduled to give speeches Tuesday.

As all of the Wall Street analysts weigh in with their predictions for interest rates, actual voting members of the Federal Open Market Committee are speaking out loud and clear. Remarks made by members of the Fed indicate that they are not yet ready to halt interest rate hikes just yet. Wall Street analysts have rushed to declare that the economy has slowed and that inflation is no longer a concern, but the Fed is taking a more circumspect approach.

The Fed recognizes that productivity gains are slowing down. This latest report also shows that unit labor costs are on the rise. Both of these factors indicate that inflationary pressures continue to build even though the economy is slowing down. Wall Street analysts must remove their rose-colored glasses and view the economy through the Fed's eyes.

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