DJ Debt Futures Review: Choppy But Lower Close After Fed Rate Hike
By Allen Sykora
BEND, Ore. (Dow Jones)--Interest-rate futures in Chicago finished softer
Wednesday on a day when the Federal Open Market Committee upped interest
rates but continued to indicate that future tightening would be "measured,"
analysts and traders said.
The final hour of trading produced some choppiness as shorts covered
after the release of an FOMC statement, moving the market from lower
territory up to near-steady levels. But when that buying stalled, prices fell
back down to where they were ahead of the Fed announcement, with the decline
aided by some dealer selling and perhaps some long liquidation.
When the dust settled, Dec 10-year notes lost 8.5 ticks to 112-00.5, Dec
Treasury bonds fell 14 ticks to 111-17 and Jun Eurodollars lost 4.5 basis
points to 96.96.
The FOMC hiked the federal-funds rate by 25 basis points to 2%. The
federal-funds futures had fully factored this into the market ahead of time.
In the wake of softer oil prices lately and a strong non-farm payrolls
report on Friday, traders had a tendency to go short ahead of the FOMC
statement, said Frank Lesh, futures analyst in Chicago with Rand Financial
Services.
"If you were short, your objective was to take out last week's lows," he
said. "Obviously, we weren't moving down (right after the Fed statement).
There was no talk of a need for more aggressive tightening. It was basically
the same statement we had last time."
Fed officials characterized inflation as being well-contained.
Thus, the futures got a bounce when it became apparent that Dec 10-years
would hold Friday's low of 111-16 and Dec bonds would hold Friday's low of
111 even, said Lesh. Those lows had been set Friday after a stronger-than-
forecast 337,000 rise in October non-farm payrolls.
Jun Eurodollars also rebounded, after they had earlier gone through
Friday's 96.99 low and bottomed at 96.945.
"There was some euphoria after the FOMC statement," said Roseanne
Briggen, senior market analyst in New York with Informa Global Markets. "They
raised rates by 25 basis points, but we knew they were going to do that. And
there was nothing in the statement to make us think they're going to be any
more aggressive."
Beth Malloy, bond-market analyst in Chicago with Briefing.com,
characterized the initial rally as a "short-covering pop."
Some buy stops might have even been touched as the futures moved through
their previous highs for the day, she continued. Volume appeared to pick up
as prices climbed through these levels, she said.
However, she said, that buying ran out of momentum. Furthermore,
sellers then stepped in and started pushing prices back down again.
Said Briggen: "We just auctioned $51 billion in securities this week (via
quarterly refunding). So dealers sold into the strength."
Alex Manzara, vice president in Chicago with Refco, said some of the
selling ahead of the meeting came from traders who had been worried that
the Fed statement might have been more hawkish on interest rates than the
market had been anticipating.
"We had a quick pop up, then fell back again on fairly light volume," he
said. "It seemed like there might be an overhang of longs and people needed
to unwind a little bit.
"There was no real curve trade associated with the sell-off after the
pop up, and there was no real volume with it. I would say it's more a
function of positioning than outright sentiment."
During the earlier part of the day, the futures had been on the defensive
in anticipation of not only more Federal Reserve tightening but pressured by
pending supply from a $14 billion 10-year note auction that occurred first
thing Wednesday afternoon, analysts said.
"We were down for the auction," said Lesh. "I've always said we tend to
dress up yields (by pushing prices lower) for these auctions, and there was
no exception on the 10-year."
A little more than an hour ahead of the Fed statement, the Treasury
concluded quarterly refunding operations by awarding $14 billion in 10-year
notes at a rate of 4.28%. The bid-to-cover ratio, an indication of demand,
was 2.05. Indirect bidders, which include foreign central banks, accounted
for a respectable 40% of the new supply.
The futures upticked slightly during the wait between the auction and
FOMC statement, said Lesh.
"We found some support," he said. "It was a decent auction - not
stellar, but good."
Interest-rate futures at the Chicago Board of Trade and Chicago
Mercantile Exchange will be closed Thursday due to Veterans Day.
Market participants now will begin assessing economic data closely to
form an opinion on what the Fed might do when it meets for the final time of
the year early next month, said Lesh. Several reports will be on the calendar
when bond traders return from their holiday Friday. The list will include:
-- retail sales at 0730 CT (1330 GMT), forecast to be up 0.2% overall in
October and up 0.6% excluding autos;
-- the University of Michigan consumer-sentiment index around 0845 CT
(1445 GMT), forecast to be around 93.0, compared to 91.7 at the end of
October; and
-- business inventories at 0900 CT (1500 GMT), expected to be up 0.4% in
September.
-By Allen Sykora; Dow Jones Newswires; 541-318-8765
[email protected]
(END) Dow Jones Newswires
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