Treasuries shave early gains before 5-year auction
Wed Apr 13, 2005 12:21 PM ET
NEW YORK, April 13 (Reuters) - U.S. Treasury debt prices erased most of their early gains by midday on Wednesday as oil prices eased and traders fine-tuned positions before the five-year Treasury note auction.
"Two major factors caused the market to lose most of the early gains," said John Canavan, market analyst at Stone and McCarthy Research Associates. "First was the decline in oil prices, which is seen as stimulative for the economy, and second is positioning ahead of the five-year auction this afternoon."
The Treasury's will hold an auction of $15 billion of five-year notes at 1 p.m. EDT (1700 GMT). The last five-year auction, in early March, drew a high yield of 4.08 percent with a bid-to-cover ratio of 2.58.
Indirect bidders, including foreign central banks, have been solid buyers of five-year notes, picking up an average of about 46 percent of the total at the last six auctions.
At midday, the benchmark 10-year Treasury note (US10YT=RR: Quote, Profile, Research) was unchanged, its yield at 4.36 percent. The 10-year yield hit a one-month low of 4.33 percent immediately after the release of the retail sales data.
Meanwhile, U.S. oil futures fell sharply on Wednesday as domestic crude supplies rose more than expected last week.
Crude for May delivery (CLc1: Quote, Profile, Research) was down 96 cents at $50.90 a barrel in midday trading on the New York Mercantile Exchange. Prices have fallen about 13 percent since last week's record high at $58.28.
Bond traders generally figure that higher oil prices will restrain consumer spending and thereby constrain economic growth and inflation pressures. Lower oil prices are seen as fueling economic growth and giving the Federal Reserve a freer hand to raise interest rates.
Bonds had gained in early trade when the government reported weaker-than-expected retail sales in March. The apparent slowdown in consumer spending caused many economists to trim their forecasts for first-quarter growth.
Any slowdown in economic growth could influence Fed bank thinking on the pace of hiking official interest rates.
U.S. retail sales rose 0.3 percent in March after a sharp downturn in department store and clothing sales, the government said. Wall Street had forecast a 0.7 percent rise in sales.
Excluding autos, which can swing sharply from month to month, retail sales rose just 0.1 percent -- the weakest reading since April 2004 -- compared with forecasts for a 0.5 percent gain.
The weaker-than-expected sales figures, when combined with a larger-than-expected February U.S. trade deficit released on Tuesday, had economists reconsidering estimates for first-quarter gross domestic product.
"A quick look at the numbers suggests that first quarter real GDP growth will be closer to 3 percent than 4 percent, especially when combined with the recent widening of the U.S. trade deficit," said John Lonski, chief economist at Moody's Investors Service in New York.
"As a result, expectations regarding Fed policy have been radically transformed from the risk of a 50-basis-point hike to the possibility that the Fed might at least temporarily halt interest rate hikes earlier than anticipated," he added.
Five-year Treasury notes (US5YT=RR: Quote, Profile, Research) were up 2/32 with a yield of 4.02 percent from 4.04, defying usual efforts to cheapen the notes ahead of an auction.
The five-year notes to be auctioned at 1 p.m. (1700 GMT), yielded 4.03 percent in when-issued trade.
The 30-year bond (US30YT=RR: Quote, Profile, Research) was down 1/32 with a yield of 4.67 percent from 4.66 percent on Tuesday, while two-year note (US2YT=RR: Quote, Profile, Research) yields eased to 3.67 percent from 3.69 percent.
On Tuesday, bond prices had rallied when minutes from the U.S. central bank's March meeting revealed increasing worries about inflation, but also suggested policymakers were not likely to ratchet up the pace of rate increases soon.
The lack of overtly hawkish language in the minutes on Tuesday pushed the yield on the 10-year note beneath technical barriers on Tuesday to as low as 4.36 percent -- its lowest level since early March.