Treasuries slide as stocks jump, no help from TIPS
Tue Jan 25, 2005 01:41 PM ET
(Adds TIPS auction details, Hoenig, analyst comments, updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Jan 25 (Reuters) - U.S. Treasury debt prices slid on Tuesday, getting little help from an auction of inflation-protected debt that drew only modest interest.
Bonds were already taking a beating as investors seized on a rally in stocks and strong consumer confidence data as convenient excuses to sell a market that had been marching higher since Christmas.
The sloppy auction of reopened 20-year Treasury Inflation Protected Securities, known as TIPS, offered no comfort to bond bulls, who had been hoping demand might have been more robust given recent strides in longer-date debt.
Benchmark 10-year notes (US10YT=RR: Quote, Profile, Research) were down 19/32 for a yield of 4.20 percent, up from 4.12 percent at Monday's close. Two-year notes (US2YT=RR: Quote, Profile, Research) were down a comparatively mild 2/32 and yielding 3.24 percent.
The disparity helped reverse a recent flattening of the yield curve, pushing the spread between 10- and two-year notes to 96 basis points from a 3-1/2-year low of 90 basis points touched earlier on Tuesday.
Traders said despite the steep drop in price, the market was still stuck in its recent range and would remain there at least for the next few days.
"The market is just flopping around until we get some more significant news," said Gregg Cohen, a trader at CIBC World Markets in New York. Two such events, he noted, would come next week as the Federal Reserve meets to set monetary policy and the government releases its monthly jobs report for January.
The flopping was tilted to the downside, with five-year notes (US5YT=RR: Quote, Profile, Research) losing 10/32 to yield 3.73 percent, up from 3.65 percent on Monday. The 30-year bond (US30YT=RR: Quote, Profile, Research) dropped 1-8/32 for a yield of 4.68 percent.
The sale of $8 billion in TIPS went at a high yield of 2.00 percent, above what many had expected. It drew bids for 1.51 times the amount on offer, only just beating the modest 1.48 times achieved at the initial sale in July.
Indirect bidders, including customers of primary dealers and foreign central banks, picked up $3.02 billion, or almost 38 percent of the issue. That compares with 47 percent at the last sale. Primary dealers got $4.90 billion of the issue.
The current 20-year TIPS (US912810FR4=RR: Quote, Profile, Research) was yielding 1.97 percent.
CONSUMERS UPBEAT
Data reported earlier showed an improved labor market was giving American consumers something to smile about. The Conference Board's measure of confidence rose to 103.4 in January from 102.7 in December, defying expectations of a small drop.
A measure indicating how difficult it is for survey respondents to find jobs also dipped, suggesting somewhat brighter employment prospects.
Meanwhile, sales of existing homes slowed more than expected to an annual 6.69 million pace in December, though that was still strong historically.
Net, the figures did nothing to change market expectations the Federal Reserve will raise official U.S. interest rates a quarter percentage point at its policy meeting next week.
Thomas Hoenig, president of the Kansas City Fed, did nothing to change that view, saying only that the course of monetary policy would depend on how economic events unfold.
The Fed meets next week and is widely expected to hike rates 0.25 percentage point to 2.50 percent.
The market has already priced in quarter-point rate hikes at the Fed's next three policy meetings, which would take fed funds to 3.0 percent by the summer.
After that, opinions diverge, with futures predicting rates no higher than 3.75 percent by year-end ,while some economists see a chance of 4.0 percent or more.
