U.S. Treasuries drop as hopes for Fed pause dim
Fri Sep 24, 2004 05:16 PM ET
(Updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Sept 24 (Reuters) - U.S. Treasury debt prices eased on Friday, boosting short-term yields as hopes faded the Federal Reserve might slow the pace of interest rates hikes.
Bond bulls were still hoping soft economic data could force policy-makers to reconsider. But minutes from the U.S. central bank's August meeting released on Thursday made it pretty clear they were determined to raise interest rates much further.
"Though the credit markets still want to disagree, the economy's path puts the odds on the side of the Federal Reserve," said an optimistic Ram Bhagavatula, Royal Bank of Scotland's chief economist for North America.
Adjusting to that possibility, two-year notes (US2YT=RR: Quote, Profile, Research) dropped 3/32 for a yield of 2.58 percent from 2.53 percent, extending an already dramatic flattening trend in the curve.
Interest rates futures (0#ED:: Quote, Profile, Research) also seemed to be taking the hint and rushed to price in a greater chance of higher rates next year.
Fed officials have repeatedly warned of the need to bring official U.S. interest rates to a more neutral level, one that neither slows nor spurs economic growth.
While that level is normally thought to lie somewhere between 3.5 percent and 5.5 percent, bond investors were hoping a recent easing of inflation could allow for a neutral level that might be lower than the historic norm.
But the Fed's August minutes dealt a blow to such hopes by noting that members believed "significant cumulative policy tightening likely would be needed" to foster price stability and sustainable economic growth.
The long end also suffered, but much less than shorter maturities. The 10-year note (US10YT=RR: Quote, Profile, Research) dipped 2/32 in price for a yield to 4.03 percent from 4.02 percent. The 30-year bond (US30YT=RR: Quote, Profile, Research) was down 4/32, taking its yield to 4.80 percent.
As a result, the spread between two- and 10-year yields shrank to 145 basis points, near its lowest reading since the Fed's emergency rate cut of Sept. 2001.
Friday's batch of economic figures had only a minor impact on the market. Orders for U.S. durable goods fell 0.5 percent in August when analysts had looked for an unchanged outcome.
However, that was overshadowed by a hefty 2.3 percent rise in orders excluding transport, and bond prices slipped.
"On balance, despite the decline by durable goods orders in August, a 2.3 percent jump excluding transportation suggests that the U.S. economy is not slumping and that manufacturing's upward trend continues," said John Lonski, chief economist at Moody's Investors Service.
Shipments of nondefense capital goods orders excluding aircraft also rose in August and pointed to another strong rise in business investment this quarter. Still, orders for this series fell, suggesting some slowdown ahead.
Other data reported Friday showed sales of existing homes fell 2.7 percent to an annual rate of 6.54 million in August. That was below analysts' forecasts of 6.65 million but still strong by historical standards.
e da futuresource
DJ Debt Futures Review: Eurodollars, Two-Years Dip; Curve Flattens
By Allen Sykora
BEND, Ore. (Dow Jones)--Eurodollars and other shorter-dated interest-rate
futures in Chicago weakened Friday as traders continued to anticipate further
rate hikes in the wake of minutes from the August meeting of the Federal Open
Market Committee that were released late Thursday.
The long end of the curve remained fairly stable, however, as the yield
curve flattened.
Mar Eurodollars lost 4.5 basis points to 97.45, while Dec two-year notes
slid 2.7 ticks to 105-18.7.
"It's follow-through from yesterday's Fed statement," said one strategist.
When the minutes of the Aug. 10 FOMC meeting were issued late Thursday,
they included the following statement: "Given the current quite low level of
short-term rates, especially when judged against the recent level of
inflation, members noted that significant cumulative policy tightening likely
would be needed to foster ... price stability and sustainable economic growth."
Thus, said the strategist, "it appears the Fed still wants to hike rates.
They are not going to stop unless there is significant weakness in the
economic data."
There was some weakness in Friday morning's economic data but not enough
to send the debt market on another upswing, contacts said. August durable
goods orders fell 0.5%, when the forecast had been for a 0.3% fall. However,
traders pointed out, orders excluding transportation actually rose 2.3%.
Also, existing-home sales fell 2.7% in August to an annual rate of 6.54
million. The forecast had been for a slip to 6.65 million.
While shorter-dated products weakened, longer-dated Treasuries remained
stable, resulting in the curve flattening. Dec 10-year notes slipped 1 tick to
113-06.5 and Dec bonds added 1 tick to 113-14.
Mark Ungewitter, portfolio manager in Boston with Investors Bank & Trust,
pointed out that a curve-flattening trade has been in effect ever since the
Federal Reserve began hiking interest rates this summer. The short end
continues to be hurt as the federal-funds futures factor in a high probability
of another 25-basis-point rate hike at the November meeting of the Federal
Open Market Committee.
"The market is looking for a fed-funds rate of 2% at the end of the year,
one way or the other, whether it's in November or December," Ungewitter added.
The Fed raised the rate to 1.75% earlier this week.
Bonds and notes didn't make much headway Friday, after earlier this week
the Dec bonds hit a life-of-contract high and Dec 10-year notes missed doing
the same by only a couple of ticks. Much of the debt market's strength lately
has probably been the result of mortgage-related convexity buying, said
Ungewitter.
"I think we are very close to a top, if we haven't already seen it," he
added.
He pointed out that commercial traders have been aggressively short in
futures for the longer end of the curve. Also, he added, bonds tend to peak
seasonally in early October.
-By Allen Sykora; Dow Jones Newswires; 541-318-8765
[email protected]
(END) Dow Jones Newswires
:smile: 
) avrebbe