Treasuries rise as market gears up for Fed meeting
Mon Sep 20, 2004 05:11 PM ET
(Updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Sept 20 (Reuters) - U.S. Treasury prices rose on Monday as some investors bet the Federal Reserve might be forced to acknowledge recent economic weakness in this week's policy statement.
The central bank is widely expected to raise interest rates another quarter percentage point on Tuesday, but bond bulls speculate policy-makers could also soften their optimism on the economy and note an easing of inflation pressures.
That would set the tone for a more moderate pace of monetary tightening, perhaps hinting at a pause in interest rate hikes down the line.
"The only uncertainty regarding the FOMC is in respect to the wording of the accompanying policy statement," said Michael Cartine, senior Treasury analyst at Thomson IFR.
"That will either suggest a switch to a more data-dependent orientation from a 1.75 percent or 2.00 percent funds rate or keep the Fed on track to raise rates at a measured pace."
The market appeared to be banking on the former scenario, pushing the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) 13/32 higher for a yield of 4.06 percent, near a five-month low and down from 4.11 percent on Friday.
Technical chart barriers are seen at last week's low of 4.05 percent and then 4.00 percent, and on the upside at 4.135 percent.
Some analysts thought the bond market's enthusiasm was overdone considering the Fed's usual reluctance to emphasize the more negative aspects of the economy.
"The Fed's press release could be written a little more bullishly for the economy than last time," said Chris Rupkey, senior financial economist at BTM.
Such a course would probably fuel a sell-off in Treasuries, reversing the recent rally.
Meanwhile, a jump in crude oil prices was also broadly supportive of government debt, since it signaled potential pressure on future U.S. consumer spending.
NYMEX crude oil futures (CLc1: Quote, Profile, Research) topped $46 a barrel for the first time in almost a month, climbing back toward record highs set in August.
Bonds were also a nice alternative for nervous stock investors, with the major equity averages languishing in negative territory.
The 30-year bond (US30YT=RR: Quote, Profile, Research) was up 19/32, yielding 4.87 percent, down from 4.91 percent. Five-year notes (US5YT=RR: Quote, Profile, Research) were up 9/32 to yield 3.27 percent, against 3.33 percent on Friday. Two-year notes (US2YT=RR: Quote, Profile, Research) rose 3/32 for a yield of 2.43 percent.
The yield curve extended its recent flattening trend, with the gap between two- and 10-year yields narrowing to 163 basis points. Earlier, that spread hit 162 basis points, the lowest since September, 2001
The decline in longer-term yields has owed much to speculation the Fed will soon pause in its tightening campaign.
At least one U.S. bank last week told clients the Fed intended to reach 2.0 percent and then go on indefinite hold, a long way short of traditional estimates of neutral policy, which encompasses a broad range of 3.5 percent to 5.5 percent.
Monday's lone piece of economic data, the National Association of Home Builders' monthly index for September, showed a decline to 68 from 71 in August. It had little impact on trading.
e da futuresource
DJ Debt Futures Review: Uptrend Intact; Helped By Stocks, Oil
By Allen Sykora
BEND, Ore. (DowJones)--Interest-rate futures in Chicago rose Monday as
traders wait for a meeting Tuesday of the Federal Open Market Committee. The
market didn't have any fresh economic fundamentals but found support from
higher energy prices, softer stocks and short covering.
The futures remain in an uptrend, said a technician.
Dec 10-year notes settled up 17 ticks at 113-07, while Dec Treasury bonds
gained 25 ticks to 112-21. Mar Eurodollars rose 4.5 basis points to 97.605,
while Jun added 8 basis points to 97.415.
"The usual suspects are energy was up for the better part of the day,
which portends weaker (economic) activity going forward, and the equities are
off a little bit," said John Nyhoff, executive vice president in Chicago with
Bank of Tokyo/Mitsubishi Futures.
Oct crude oil gained 76 cents to $46.35. As the interest-rate pits were
closing, the Dow industrials were down by around 85 to 90 points.
Some of the gains in the debt futures were traders covering short
positions going into the FOMC meeting, said Nyhoff.
"We had a nice rally Thursday, sold off Friday and rallied back again
today," he said. "The market is continuing to grope for a sense of what the
market is likely to do going into the end of the year."
So far, said Nyhoff, traders are expecting a 25-basis-point rate hike on
Tuesday plus one more by the end of the year. However, they will be closely
scrutinizing the Fed's policy statement for clues on what to expect going
forward.
"Volume was considerably lighter than the last couple of days," Nyhoff
added. "The FOMC meeting, along with today being a Japanese holiday, has
detracted from the overall activity."
Vikram Patel, technical analyst in New York with Informa Global Markets,
said that the futures remain in an uptrend on a course toward upper-
channel resistance. However, the market also could be getting some caution
signs in the form of recent Relative Strength Index readings and volume/open
interest data, he said.
Since their 111-02.5 low of Sept. 3, Dec 10-year notes have been moving
higher in spurts, with sideways consolidation between updrafts, explained
Patel. Some of those spikes higher have included moves to 112-10.5 on Sept. 8
and 113-05.5 last Thursday. The futures at the moment appear to be undergoing
more sideways consolidation, in possible preparation for yet another leg
higher, continued Patel.
"At this point, we're looking for another move higher toward upper-
channel resistance that comes in at 113-28," said Patel. Channel resistance is
drawn from the June 14 low of 105-25 and the May 27 high of 107-20.
"The uptrend remains intact," said the technical analyst.
However, he did offer caution. He pointed out that a bearish divergence is
occurring with the Relative Strength Index.
"The recent peaks in September have been partnered by lower RSI figures
showing bearish divergence in momentum," said Patel. "If this continues going
forward, this is a cautioning sign that the trend is losing momentum and that
we may be nearing a top."
Yet another caution sign, he added, was a decline in open interest and
volume that had been occurring for a while going into Monday's session. The
message behind the volume and RSI readings could be that any upper-channel
resistance around 113-28 could be especially strong, said Patel.
He put support for the Dec 10-year notes in the range from 112-07 to 112-
01. A breakdown below this could turn the tables against the bulls, meaning
the market has put in a top and taking away any ideas of hitting that upper-
channel resistance of 113-28, which will become 114-04 to 114-06 next week.
Jun Eurodollars have been climbing more steadily than 10-years since
putting in their recent low of 97.07 on Sept. 8, said Patel. They got up to
97.47 Friday.
The key upper-channel resistance in this market is around 97.69, which
would rise to 97.75 next week, explained Patel. The upper channel is drawn
from the May 27 high of 96.85, with the lower channel drawn from the June 15
low of 96.29.
The key support, he continued, is the Sept. 16 low of 97.30.
"The trend is bullish. But as in the 10s, in the Eurodollars you're
seeing a divergence in momentum, especially the daily RSI," said Patel. "With
each peak since the August high...the momentum hasn't caught up with the
prices."
And that, he continued, is a caution sign suggesting a possible weakening
could occur in the Eurodollar trend. Also, he added, open interest and volume
have been dropping since Sept. 10, also suggesting the upward trend may be
losing momentum.
A statement from the FOMC is expected Tuesday around 1315 CT (1815 GMT).
One major economic report is on the calendar in the morning - August housing
starts at 0730 CT (1230 GMT). The forecast is for an annual rate of 1.95
million units, compared to 1.98 million in July.
-By Allen Sykora, Dow Jones Newswires; 541-318-8765
[email protected]
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