Treasuries rise as McTeer comments provide relief
Tue Sep 7, 2004 03:51 PM ET
(Adds comments, updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Sept 7 (Reuters) - Treasury prices held on tight to early gains on Tuesday as investors breathed a sigh of relief after a top Federal Reserve official largely steered clear of discussing recent trends in U.S. economic data.
Dallas Fed President Robert McTeer said he was hopeful a soft patch in the economy was now a thing of the past, blaming the bulk of the recent weakness on a spike in oil prices.
Much of the session's move higher was technical in nature, traders noted, and could fall prey to any upbeat comments from other Fed officials scheduled to speak this week -- especially Fed Chairman Alan Greenspan on Wednesday.
According to a Reuters poll, primary bond dealers are in unanimous agreement that the central bank will raise interest rates by another quarter-percentage point at its next meeting, on Sept. 21.
But the future beyond that is still up for debate and Greenspan's testimony before the House Budget Committee on Wednesday will help Fed-watchers tweak their forecasts.
In afternoon trading, the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) had climbed 10/32 in price, while its yield dipped to 4.25 percent from Friday's 4.29 percent.
"You had an enormous sell-off on Friday, and now we're seeing some short-covering," said Mark Mahoney, Treasury market strategist at UBS.
Yields, which move opposite to price, were as low as 4.08 percent last week before jumping as high as 4.30 percent as the August payrolls report proved relatively strong compared to recent months.
The 4.30-percent-to-4.31-percent level marks the ceiling of the past month's trading range and has proven tough to break. If it were to be breached, analysts said the market could well fill a gap left after the poor July payrolls report sent yields diving.
"We expect an accelerated sell-off to the pre-July jobs level of 4.45 percent," said Richard Gilhooly, fixed-income strategist at BNP Paribas.
Investors were eager to hear Greenspan's own interpretation of recent economic news, particularly his views on a job market whose fate is closely linked with the likely path of interest rates going forward.
Apart from digesting policymakers' comments, the market faces $24 billion of five- and 10-year Treasury supply and a heavy corporate issuance calendar this week. The Treasury sells $15 billion of five-year notes on Wednesday and $9.0 billion of reopened 10-year paper on Thursday.
The current five-year note (US5YT=RR: Quote, Profile, Research) rose 4/32 in price, its yield dipping to 3.46 percent from 3.49 percent. The 30-year bond (US30YT=RR: Quote, Profile, Research) added 20/32, while its yield eased to 5.01 percent from 5.05 percent on Friday.
With the market now pricing in at least two more Fed rate hikes before year-end, shorter-dated debt was underperforming and the yield curve flattening.
Two-year note yields (US2YT=RR: Quote, Profile, Research) were flat at 2.58 percent, so the spread under 10-year yields contracted to 167 basis points, its narrowest point since September 2001.