US Treasuries knocked back, still ahead for week
Fri Sep 17, 2004 10:47 AM ET
(Adds consumer data, reaction)
By Wayne Cole
NEW YORK, Sept 17 (Reuters) - U.S. Treasury debt prices dipped on Friday after a survey of U.S. consumers proved not to be as dismal as bond bulls had bet on, leading to profit-taking on the week's hefty gains.
The University of Michigan's index of consumer confidence eased to 95.8 in September from 95.9 in August. Analysts had looked for a rise to 96.5, but many traders were betting on a much softer number after the IBD/TIPP survey of consumers, out earlier this week, showed a drop off in confidence.
The subsequent selling knocked 5/32 off the price of the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) . Yields edged up to 4.10 percent. But that follows a 10-basis-point-drop to a five-month low of 4.07 percent on Thursday.
As with other data this week, the figures did little to temper market expectations that the Federal Reserve will raise interest rates at its meeting next week.
There has been growing speculation that the central bank may go slower with its hikes after September, though many economists argue this is wishful thinking by bond bulls.
"The bond market's got its head in the clouds right now, but the Fed will bring it back to earth next week," said Ram Bhagavatula, chief economist at RBS Greenwich. "The recent data justify the Fed taking an upbeat view on the economy," he said.
That would be a disappointment to many bond investors who are betting the Fed would soften its policy statement.
"The Fed is going to keep on hiking, and we doubt it will take a breather until rates reach a more natural level around 3.5 to 4.0 percent," Bhagavatula.
Five-year notes (US5YT=RR: Quote, Profile, Research) dipped 5/43, taking their yield up to 3.31 percent from 3.27 percent late Thursday. The 30-year bond (US30YT=RR: Quote, Profile, Research) lost 9/32, lifting yields to 4.90 percent from 4.88 percent though that is still down on last Friday's 4.97 percent close.
Much of Thursday's sharp rally was pinned on 'black box' and momentum funds taking advantage of holiday-thinned conditions to pressure a short market, and these types of investors tend not to hold positions for long.
"This move has every sign of a quiet market squeeze," said Richard Gilhooly, fixed-income market strategist at BNP Paribas. He, like many other analysts, felt the rally defied logic given recent economic data had not been that weak and the Federal Reserve still clearly planned to hike interest rates at its meeting next week.
"Tuesday's FOMC still holds the key for the market, with 25 basis points still all but certain," said Gilhooly. "The statement following the meeting will carefully scrutinized for any sign of future plans."
The market will likely need a softening in the Fed's policy message to justify the latest drop in long-term yields. Short-term yields have less room to fall given the market is pricing in a fed funds rate of 2.00 percent by year end.
Yields on two-year notes (US2YT=RR: Quote, Profile, Research) are already down at 2.46 percent, putting them just 96 basis points above the funds rate. That gap is the narrowest in five months and set to shrink further assuming the Fed does hike by 25 basis points next week.
Indeed, spreads have been shrinking across the yield curve with the gap between two-year and 10-year yields hitting 165 basis points -- its lowest levels since September 2001. And this trend was expected to continue.
"The direction of the curve is unlikely to be affected by a potential pause in the Fed's rate rises - past history shows that the curve continues to flatten even while the Fed takes a break from hiking," noted BNP's Gilhooly.
...era per dire un tick 3.125
