US Treasuries take technical spill, mood bearish
Tue Mar 8, 2005 12:22 PM ET
(Adds Poole comments, consumer data, updates prices)
By Wayne Cole
NEW YORK, March 8 (Reuters) - U.S. Treasury debt prices retreated on Tuesday as a sudden bearish chill gripped the market and led investors to take profits on recent gains.
Traders were hard pressed to find any fundamental reason for the pullback, instead offering various theories including leveraged and mortgage-related selling, pressure from corporate issuance, worries about foreign demand and even the inflationary threat of faster money supply growth.
Dealers were also inclined to cheapen prices into auctions of $24 billion in five- and 10-year paper, to be held on Wednesday and Thursday, respectively, just in case a shortfall of private demand leaves Wall Street holding most of the paper.
Whatever the excuse, the selling did not have to be large to dent prices in such a thin market and the benchmark 10-year Treasury note (US10YT=RR: Quote, Profile, Research) shed 18/32 in price. Its yield rose to 4.38 percent from 4.31 percent, with bulls in retreat, having failed to break 4.25 percent and bears aiming to retest a major barrier at 4.42 percent.
"Technical sellers are pushing the market around," said Richard Gilhooly fixed-income market strategist at BNP Paribas. "And they're likely to have their way until the next core inflation report comes out."
The consumer price report is out on March 23 but the Federal Reserve's favored measure of inflation -- the core personal consumption expenditures price index -- is not due until the end of the month.
"The last core PCE printed at 0.3 percent and another rise like that would really set inflation alarms ringing. We think it'll only be up 0.1 percent, but the bears are presuming the long-end of the market guilty until proven innocent," Gilhooly added.
Investors had shifted money into longer-dated debt after Friday's jobs report calmed immediate concerns about inflation, lowering long-term yields and flattening the yield curve.
But after just two days, investors were already taking profits, highlighting just how jittery sentiment was right now. The resulting underperformance by long-term debt saw the gap between two- and 10-year yields widen by four basis points to 75 basis points.
Likewise, the 30-year bond (US30YT=RR: Quote, Profile, Research) fell a full point in price, lifting yields to 4.70 percent from 4.64 percent. Yields on the five-year note (US5YT=RR: Quote, Profile, Research) rose to 4.06 percent from 3.98 percent, while those on the two-year note (US2YT=RR: Quote, Profile, Research) edged up to 3.63 percent from 60 percent.
The latter yield is up over 50 basis points so far this year and is expected to head much higher as the market sees no end to Fed rate hikes. Futures markets (0#ED:: Quote, Profile, Research) are pricing in rates close to 4.00 percent by year-end -- a long way from the current 2.50 percent.
Speaking on Tuesday, Fed Bank of St. Louis President William Poole offered no clues on the policy outlook, instead confining his remarks to an appraisal of U.S. and global current account deficits.
Fed Board Gov. Ben Bernanke is due to speak on the economic outlook at 1 p.m. EST (1800 GMT).
The data out on Tuesday were of only secondary importance and had scant impact on the market. Two surveys of weekly chain store sales showed demand slipped in the week to March 5, but annual growth was still traveling at a healthy pace after a strong February.
The Investor's Business Daily consumer confidence index dipped to 53.0 in March, from 54.8 in February, disappointing some analysts who had hoped for some improvement given the run of stronger economic data.