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US Treasuries mixed as auction supply absorbed
Fri Feb 11, 2005 01:14 PM ET
By Ellen Freilich
NEW YORK, Feb 11 (Reuters) - U.S. Treasury prices were narrowly mixed on Friday as the market absorbed new supply from the Treasury's just-completed $51 billion quarterly refinancing and looked ahead to congressional testimony next week from Federal Reserve Chairman Alan Greenspan.
"There's almost nothing going on," said Drew Matus, senior financial economist at Lehman Brothers. "The auctions are done. The yield curve started to steepen out a little bit and that didn't work."
At midday, the benchmark 10-year Treasury note (US10YT=RR: Quote, Profile, Research) was down 3/32 in price to yield 4.08 percent, while the two-year note (US2YT=RR: Quote, Profile, Research) was down 1/32 in price to yield 3.32 percent, putting the difference between two- and 10-year note yields at 76 basis points.
"Basically, people are waiting for Greenspan on Wednesday. We may have a little moving around before then, but I can't imagine anything significant happening before Greenspan talks on Wednesday," Matus added.
Greenspan is due to testify on the U.S. central bank's semiannual report on monetary policy before the Senate Banking Committee and then the House Committee on Financial Services.
Short-term yields have been rising while long-term yields have fallen since the start of the year as the Fed has showed no sign of pausing in its measured rate hikes.
But traders saw hints of some cracks in the Fed's resolve this week when Fed Bank of Atlanta President Jack Guynn said the bank might need to change the language in its policy statement, perhaps dropping the reference to a "measured" pace of removing monetary accommodation.
This time around, the market interpreted that possibility as a sign that the Fed might not raise rates at each of its policy meetings this year, which briefly caused the yield curve to steepen out slightly with shorter maturities outperforming long-dated debt.
But that reversal of the flattening trend mostly peetered out by midday with only the 30-year Treasury bond in the plus column and the rest of the yield curve under water.
"Trading on Friday has been a classic redistribution of the 10-year supply the market got this week and really all the supply from the refunding," said James Caron, fixed-income strategist at Merrill Lynch Government Securities. "Arguably we took down supply at the highs of the market and what occurs after that is a redistribution."
Given that the curve had flattened so much, the long end of the maturity range was the most vulnerable to selling, Caron said. So there was a slight steepening of the yield curve after weeks of profitable flattening trades.
Investor speculation that Fed Chairman Alan Greenspan may be more dovish next week in comments to Congress also may have helped spur traders to unwind recent curve flattening positions, traders said.
"With Greenspan next week, if there is any sniff that maybe they are coming close to the end of their tightening, then maybe these flattening trades are not going to pay off as much as they have already, and that is why people are being a little more cautious about the flattening trades," said Kevin Logan, economist at Dresdner Kleinwort Wasserstein in New York.
"If they unwind those flattening trades the front end does a little better and the back end does a little worse."
"People are still a little bit cautious about the longer end," Logan said.
This caution was evidenced this week in the government's $51 billion quarterly refunding, which had good indirect bidder interest in the two-year and three-year notes, but relatively limp indirect bidder interest in an auction of 10-year notes.
"In the early auctions they were able to get out of their short front positions and then you just didn't see the demand in the longer end," Logan said.
"We are working our way back to the middle of the range," said Lundy Wright, head of Treasuries and agency trading at Nomura Securities.
The 30-year bond (US30YT=RR: Quote, Profile, Research) , whose yield has plunged 50 basis points since the start of the year, was up 7/32 with a yield of 4.46 percent, while the 5-year note (US5YT=RR: Quote, Profile, Research) was yielding 3.67 percent.
Little in the way of market-moving data was scheduled on Friday, although investors will hear from a couple of Federal Reserve speakers.
Fed Governor Ben Bernanke will talk Friday afternoon on "Inflation Control in Latin America," while Fed Bank of San Francisco President Janet Yellen will participate in an Economic Outlook discussion.
