US Treasuries hurt by worries over foreign demand
Thu Jan 27, 2005 09:43 AM ET
By Wayne Cole
NEW YORK, Jan 27 (Reuters) - Short-term Treasury yields hit 2-1/2 year highs on Thursday, driven in part by worries of fading overseas demand for U.S. assets.
A solid report on U.S. business investment triggered some initial selling, but had little lasting impact.
Rather the market was suffering indigestion after $32 billion of note issuance this week drew only lackluster private demand, leaving much of the paper in dealers' hands. The poor reception stirred concerns that foreign central banks were losing their appetite for Treasuries just a fortnight before the government was set to sell over $50 billion in new debt.
The overhang of supply pushed two-year yields (US2YT=RR: Quote, Profile, Research) up to 3.30 percent, the highest reading since mid-2002, from 3.27 percent on Wednesday. The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) fell 7/32 in price, lifting its yield to 4.23 percent from 4.20 percent.
Yields on five-year notes (US5YT=RR: Quote, Profile, Research) rose to 3.76 percent from 3.73 percent, while those on the 30-year bond (US30YT=RR: Quote, Profile, Research) hit 4.69 percent from 4.67 percent.
Traders became alarmed on Wednesday when indirect bidders, a category that includes foreign central banks, took a decidedly meager 29 percent of a $24 billion two-year note auction.
Overseas central banks, particularly in Asia, bought a massive $204 billion of Treasuries last year and any hint of a pullback can hurt market sentiment.
Traders were thus unnerved by comments from Fan Gang, director of the Beijing-based National Economic Research Institute, that China should switch the yuan's peg from the dollar to a basket of currencies, including the euro and yen, because of instability in the U.S. currency.
The timing was especially sensitive as earlier this week the White House raised its forecast for the 2005 fiscal budget deficit to a whopping $427 billion, surprising many analysts who had been counting on a steep decline.
"The widespread notion of only a few months ago that the U.S. would be taking genuine steps down the path of fiscal consolidation in 2005 now looks hugely optimistic," said Richard Iley, an economist at BNP Paribas.
The lack of fiscal restraint was likely to keep pressure on the dollar and might even mean the Federal Reserve could have to be more aggressive in raising interest rates, he said. The Fed is already expected to hike rates next week and at the two following policy meetings.
"The key question in 2005 remains -- how long will foreign central banks continue to lend to the largest debtor in history who shows no willingness to contemplate curbing her profligacy?" he wondered.
Concerns over foreign demand overshadowed Thursday's economic data, which were anyway considered mildly bearish for bonds.
Orders for durable goods rose 0.6 percent in December when analysts had looked for a 0.4 percent gain, though there had been chatter in the market that it would be much higher.
Still, nondefense capital goods orders excluding aircraft, a proxy for future business investment, rose a healthy 1.8 percent. Shipments were also up 2.2 percent, suggesting investment should make a healthy contribution to fourth quarter GDP growth, data for which are due on Friday.
Also out were initial jobless claims, which rose to 325,000 from 318,000 the week before, though the series has been so volatile recently that analysts take it with a pinch of salt.
