U.S. Treasuries lower in case Fed changes message
(Updates prices, comment)
By Ellen Freilich
NEW YORK, Dec 14 (Reuters) - Treasuries prices were lower on Tuesday shortly before the Federal Reserve was expected to raise U.S. interest rates for the fifth time this year.
Figures showing a record U.S. trade deficit also weighed on bonds, and the benchmark 10-year note <US10YT=RR> lost 5/32 in price. Its yield rose to 4.17 percent from 4.15 percent late Monday, still far below this month's 4.42 percent peak.
A quarter percentage point hike from the Fed has long been priced in and the market should take it calmly. But traders were wary in case the central bank adjusts its outlook for future policy.
"The price declines occurred after the trade data, probably because the strong import figures implied strength in consumer spending," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities. "There's also a little nervousness about the Fed meeting because there's a small chance that the Fed might change the inflation wording in its policy statement."
Most analysts, however, believe any changes to the post-meeting statement will be cosmetic.
"We err on the side that the less changed the better, and instead seek enlightenment with either the February meeting or Humphrey Hawkins testimony," said David Ader, U.S. government bond strategist at RBS Greenwich.
Fed Chairman Alan Greenspan's semi-annual survey of the U.S. economy was previously known as the "Humphrey-Hawkins testimony," named after the legislation requiring it.
Ader noted that recent data had shown tame hourly earnings, a fall-off in the factory work week, tepid job growth, oil prices down about 25 percent and a not-so-robust holiday shopping season.
Additional data on Tuesday showed industrial production rose 0.3 percent in November after a 0.6 percent gain the previous month. The result was exactly as expected and had little discernible impact on the market.
"It was a respectable report, but in no way was it a brisk report on the manufacturing sector. You had moderate growth in activity, but shy of what we were getting earlier in the year," said Daiwa Securities America chief economist Michael Moran.
"This is not the stuff to warrant a more hawkish line (from the Fed)," Ader said. "In any event, the statement from last month leaves the Fed open and flexible to further tightenings as circumstances warrant. Why change that now?"
If the statement is boilerplate it could warrant a relief uptick in bond prices, while any hint of a more aggressive stance on inflation would likely spark a sharp slide.
That balance of risks kept the market on the defensive. The two-year note <US2YT=RR> dipped 1/32 in price, lifting yields to 2.99 percent from 2.97 percent late Monday.
In the belly of the curve, the five-year note <US5YT=RR> slipped 4/32, taking yields to 3.57 percent from 3.54 percent. The 30-year bond <US30YT=RR> lost 7/32, leaving yields at 4.82 percent.
The U.S. merchandise trade deficit ballooned to a record $55.46 billion in October. Analysts had looked for only a modest increase to $53.0 billion.
Worries about whether the United States could keep funding the deficit hurt the dollar. Bond investors have become increasingly worried that an ever-sliding dollar could scare investors away from U.S. assets.
One favored trade has been to borrow Treasuries, sell them and use the money to buy euro debt. This promises to make money both through currency moves and through a divergence in yield spreads as the Fed tightens while the ECB stands still. ((Reporting by Ellen Freilich, editing by Dan Grebler; Reuters Messaging:
[email protected]; e-mail:
[email protected]; Tel: +1 646-223-6309))
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--------------MARKET SNAPSHOT AT 9:26 a.m. (1426 GMT) ----------------------
March Eurodollar <EDH5> 97.11 (-0.010)
March T-Bond <USH5> 112-21/32 (-06/32)
March 10-year note <TYZ4> 112-25/32 (-06/32)
Change vs Current
Nyk yield
Three-month bills<US3MT=RR> 2.21 (+0.02) 2.253
Six-month bills <US6MT=RR> 2.42 (+0.04) 2.500
Two-year note <US2YT=RR> 99-25/32 (-01/32) 2.990
Five-year note <US5YT=RR> 99-22/32 (-03/32) 3.565
10-year note <US10YT=RR> 100-19/32 (-06/32) 4.184
30-year bond <US30YT=RR> 108-06/32 (-06/32) 4.820