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...non capisco
US Treasuries mixed, put dovish spin on Guynn talk
Wed Feb 9, 2005 09:41 AM ET
By Wayne Cole
NEW YORK, Feb 9 (Reuters) - Short-dated U.S. Treasury debt bounced on Wednesday as some investors interpreted comments from a top Federal Reserve official to mean the central bank may pause in raising rates in the not too distant future.
In an interview with the Wall Street Journal, Fed Bank of Atlanta President Jack Guynn said the Fed still had some way to go in raising rates. However, he added that at some point, and perhaps soon, the Fed might need to change the language in its policy statement, maybe dropping references to "measured" and "accommodative".
The market latched onto the last point, since traders reasoned that if policy was no longer "accommodative" the Fed might not have to tighten any further.
"This is a dovish comment for Guynn," said James Glassman, senior economist at JPMorgan, noting Guynn had a reputation as an inflation hawk.
"Now, Guynn does not speak for the whole Fed, but if the most hawkish members of the committee are talking like this then the center of gravity at the Fed may be shifting," said Glassman.
Many in the bond market took the comments to mean the Fed may hike rates at the next one or two meetings -- which is already fully priced into futures -- and then pause. As a result, Eurodollar futures (0#ED:: Quote, Profile, Research) trimmed expectations for how high rates may rise later in the year.
Short-term Treasuries also firmed, though gains were limited given investors still expected a couple more Fed hikes. Yields on two-year notes (US2YT=RR: Quote, Profile, Research) dipped to 3.28 percent from 3.32 percent late Tuesday.
Longer-dated debt, however, ran into profit-taking as yields have fallen sharply recently as investors bet the Fed's tightening would curtail future inflation. These curve flattening trades involve selling short-term debt and buying the long-end, but with shorter-dated debt rallying some investors had decided to unwind their positions.
The resulting shift saw the 30-year bond (US30YT=RR: Quote, Profile, Research) slip 25/32 in price, lifting yields to 4.42 percent. On Tuesday yields had delved as deep as 4.35 percent, the lowest reading since mid-2003 and a drop of almost 60 basis points since Christmas.
The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) fell 7/32 in price, taking its yield to 4.05 percent from a three-month trough of 4.02 percent.
Five-year yields (US5YT=RR: Quote, Profile, Research) eased only fractionally, to 3.65 percent from 3.66 percent, as the market still has to digest a $15 billion sale of new paper later in the session.
Traders remain anxious the auction will fail to attract foreign demand, even though indirect bidding at Tuesday's three-year auction came in above average. Pessimists noted a sale of Japanese government five-year paper overnight had led to a steep sell-off in JGB's.
"The strong bid in yesterday's three-year note auction has set a positive tone for this week's remaining operations," said William Prophet, interest rate strategist at UBS.
But he warned that demand in Treasury auctions often fluctuated sharply from issue to issue and a good performance at one was not a guarantee for others.
Prophet added that a high indirect bid did not necessarily mean that foreign accounts were unusually active. Primary dealers are direct bidders while indirect bidders cover almost everyone else, including foreign central banks.
The indirect bid for the five-year had been volatile recently, dropping to 32 percent in September, bouncing to 66 percent in December, then falling to 40 percent in January.
"Over the past year, this volatility has normally come at the hands of domestic investment funds, not foreign accounts," said Prophet. Indeed, foreign purchases of Treasuries were remarkably stable during the first three quarters of 2004, at between 25 percent and 35 percent of every auction.