Treasuries recoup some losses, focus on next week
Thu Jan 27, 2005 04:00 PM ET
(Updates prices, adds economist comments)
NEW YORK, Jan 27 (Reuters) - Treasuries prices recouped some early losses on Thursday afternoon to trade slightly lower in range-bound trading ahead of what is expected to be market-moving data and geopolitical events next week.
The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) traded 3/32 lower as of Thursday afternoon, its yield up to 4.22 percent from 4.20 percent on Wednesday.
"It has been sort of a slow recovery through the day," said Steve Gallagher, U.S. chief economist at SG Corporate & Investment Banking in New York. "The market has found its center ahead of a lot of major news and events coming next week."
A solid report on U.S. business investment triggered some initial selling on Thursday, 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 3.29 percent. The two-year yield reached 3.30 percent on Thursday morning, its highest reading since mid-2002, from 3.27 percent on Wednesday.
Yields on five-year notes (US5YT=RR: Quote, Profile, Research) moved up to 3.75 percent from 3.73 percent, while those on the 30-year bond (US30YT=RR: Quote, Profile, Research) were at 4.68 percent, from 4.67 percent.
Economists said the market was biding its time in anticipation of clearer direction from upcoming events, including a Federal Open Market Committee meeting on Feb. 1 and Feb. 2, and a meeting of the G7 trading partners.
"There is basically not much reason to move ahead of employment numbers (on Feb. 4), the FOMC, G7, and the Iraq vote (on Jan. 30)," Gallagher said.
Weakness in the morning was in part driven by trader alarm after indirect bidders, a category that includes foreign central banks, on Wednesday 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 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?" Iley asked.
Concerns about foreign demand overshadowed Thursday's economic data, which were considered mildly bearish for bonds.
Orders for durable goods rose 0.6 percent in December. Analysts had looked for a 0.4 percent gain, though there had been chatter in the market that it would be much higher.
Initial jobless claims rose to 325,000 from 318,000 the previous week, though the series has been so volatile recently that analysts take it with a pinch of salt.
US 10-year yield seen up to 4.65 pct mid-year-group
Thu Jan 27, 2005 04:28 PM ET
NEW YORK, Jan 27 (Reuters) - Yields on 10-year Treasury notes should climb gradually to 4.65 percent by mid-year as the Federal Reserve raises short-term rates and long-term inflation stays tame, a bond industry group said on Thursday.
The forecast for 10-year yields (US10YT=RR: Quote, Profile, Research) at the end of June would be below the 4.87 percent level at the same time last year, the Bond Market Association said in a statement.
Ten-year yields closed at 4.22 percent at the end of 2004.
Meanwhile, yields on two-year Treasuries (US2YT=RR: Quote, Profile, Research) are predicted to climb to 3.83 percent by June, up from 3.07 percent at the end of 2004, the Washington-based group said.
In late Thursday afternoon, two-year yields were at 3.29 percent and 10-year yields 4.21 percent.
The spread between two-year and 10-year yields is expected to tighten to 80 basis points by June from 115 basis points at the end of last year, the group said.
This spread tightening, or curve flattening, has been driven since last year on players betting that longer-dated Treasuries will fare better than short-dated issues.
Eighty percent of survey respondents recommended that investors should overweight 10 to 30 year securities, the bond industry group said.
On Thursday, the two- to 10-year spread was 92 basis points, two basis points tighter than Wednesday.
"The yield curve usually flattens when the Fed tightens monetary policy as it's doing now. In fact, spreads are still pretty wide today compared to other periods," Micah Green, the group's president, said in the statement.
Separately, the group said Treasury issuance will total $89.2 billion in the first quarter, compared with $89.7 billion for the same quarter a year earlier.
The association, which represents U.S. bond dealers, based its forecasts on a survey of members.