US bonds fall before Fed meets

Bond prices in the United States dropped ahead of today's monthly meeting of the Federal Reserve, as traders questioned prevailing wisdom that an interest rate rise would not be needed to curb an over-heating economy.

The benchmark Treasury bond fell 0.38 per cent, about $3.75 per $1,000 bond, while yields rose to 6.8 per cent during trading yesterday.

Terrence Pigott, head trader at Daiwa Securities, said: "Most people think [the meeting] is going to be a non-event. The market would sell off if they did tighten interest rates."

Meanwhile, the US dollar closed lower in London against the German mark yesterday, falling from Dm1.4900 to Dm1.4875 and losing gains made on Friday after traders scaled back expectations of a cut in interest rates at the Bundesbank's meeting on Thursday.

Despite fears of a possible rise in rates from the Federal Open Market Committee (FOMC), most leading economists discounted the possibility.

"We are looking for no policy changes and most people in the market expect the same," said Michael Englund, chief economist at MMS International, a research firm which surveys market economic views.

"Our view is that economic data continues to show a fairly healthy economy in the third quarter, but in the absence of any surprises on the inflation front, the Fed has been let off the hook."

Most economic data for July showed a slowing of economic activity from a very strong second quarter when US gross domestic product surged to 4.2 per cent from a first quarter reading of just 2.0 per cent.

"While Fed officials are all but certain to leave policy unchanged at the FOMC meeting the recipe for renewed debate about eventual Fed tightening is already in the making," warned John Lipsky, chief economist at Salomon Brothers.

One concern was recent jobless claim figures, which "have dropped appreciably," said Bill Sullivan, director of money market research at brokerage firm Dean Witter Reynolds.