US Treasuries slide, yields hit highs for 2005
Mon Feb 28, 2005 12:50 PM ET
(Recasts; updates prices; changes dateline, previous CHICAGO)
NEW YORK, Feb 28 (Reuters) - Benchmark U.S. Treasury debt yields on Monday climbed to their highest levels so far this year as mortgage-related selling and the break through a major chart level caught many in the market by surprise.
Strong readings on U.S. inflation and manufacturing also added to expectations for more interest rate hikes ahead, driving down Eurodollar (0#ED:: Quote, Profile, Research) and Fed fund futures.
The benchmark 10-year Treasury note (US10YT=RR: Quote, Profile, Research) slid 21/32 in price, driving yields up to 4.35 percent from 4.27 percent on Friday. The break over 4.30 percent took yields to their highest level since early December and triggered a wave of technical selling, traders said.
"The original pressure came out of the mortgage market but once 4.30 (percent) gave way, all the black box and CTA types jumped on the bandwagon," said one trader at a U.S. primary dealer.
"We paused at 4.35, but even that didn't hold long and now bears are looking to test the next highs around 4.41 or so," he added.
Traders also reported profit-taking on recent curve-flattening bets which resulted in the selling of longer-dated debt and a widening in the spread between two- and 10-year paper.
Yields on the two-year note (US30YT=RR: Quote, Profile, Research) rose to 3.58 percent from 3.53 percent late Friday, while those on the five-year note (US5YT=RR: Quote, Profile, Research) firmed to 3.99 percent from 3.91 percent.
After holding steady in earlier trade, the 30-year bond (US30YT=RR: Quote, Profile, Research) took a sudden tumble, sliding 1-6/32 to lift yields to 4.71 percent from 4.64 percent.
The market had come under early pressure after an unexpectedly large rise in core U.S. inflation revived concerns that official interest rates might have to rise faster and farther than first thought.
The core price index for personal consumption expenditures rose 0.3 percent in January, above most expectations. Annual growth edged up to 1.6 from 1.5 percent, when most analysts had looked for a slight slowdown.
"This is a significant surprise given that it is the price measure that the Fed -- and Greenspan in particular -- focuses on," said Alan Ruskin, research director at 4CAST. Fed Chairman Alan Greenspan is set to appear before the House Budget committee on Wednesday.
"The data are likely to affirm some views that inflation will only remain contained, if the Fed tightens substantially," said Ruskin. "It's a significant negative for the (yield) curve as a whole, especially the front end."
Adding to the pressure were robust reports on manufacturing from Chicago and New York. The more important Chicago activity index firmed to 62.7 in February from 62.4 a month earlier, led by a rise in new orders.
Meanwhile, the employment index climbed to 57.7 from 52.8, stoking speculation the February payrolls report could finally show a substantial gain in jobs when released on Friday.
"The risk is that the February data will prove larger than presently forecast. Thus the FOMC will have more positive news on the economy to reinforce its determination to push the funds rate up to neutral," said Brian Fabbri, an economist at BNP Paribas.
