U.S. Treasuries drop on firm NY state factory data
Wed Mar 15, 2006 12:55 PM ET
By Oliver Ludwig
NEW YORK, March 15 (Reuters) - U.S. Treasury debt prices fell on Wednesday, a day after a sharp rally, on a stronger-than-expected survey of manufacturing in New York state, which kept in focus the view that the Federal Reserve is not finished raising interest rates.
Prices were also weighed down by data showing a sharp decline in Treasury debt purchases in the Treasury Department's monthly capital inflows data.
The New York Federal Reserve's "Empire State" factory survey shot up to 31.16, the highest since July 2004, compared with an upwardly revised 21.02 in February. Economists had expected a February result of 19.0.
"The Empire State report was strong ... and the selling pressures stayed there," said George Goncalves, a debt strategist with Banc of America Securities in New York.
Benchmark 10-year notes fell 11/32, with yields rising to 4.74 percent, compared with 4.70 percent on Tuesday.
Two-year notes <US5YT=RR> eased 1/32 in price, with yields edging up to 4.67 percent, against 4.65 percent on Tuesday. Wednesday's movement put 10-year yields about 7 basis points over two-year yields, the widest margin so far this year as the yield curve continues its recent steepening trend.
The Treasury Department reported total capital inflows were $66 billion in January, up from from $54 billion in December. More to the point, purchases of Treasuries fell in January to a much-smaller-than-expected $4.4 billion from $18.3 billion in December.
"The market was expecting a bigger number. Perhaps there was a bit of disappointment and so the market sold off," said Frank Hsu, director of global fixed income at Fimat in New York.
Another factor adding downward pressure on prices came from corporate debt issuers -- possibly including Deutsche Telecom and Goldman Sachs -- who traders suspected were selling Treasuries as a hedge against the possibility of rising rates before they issue debt in the near future.
Five-year notes <US5YT=RR> dipped 3/32, pushing yields up to 4.71 percent from 4.68 percent on Tuesday.
Thirty-year bonds <US30YT=RR> shed 28/32 in price, pushing yields up to 4.76 percent against 4.71 percent on Tuesday.
The Treasuries market has been selling off for the better part of two months amid widespread views that central banks around the world are now in a credit-tightening mode.
But that tide turned earlier this week, particularly on Tuesday, as the bond market rallied amid views that perhaps the selling had gone too far.
Fed officials have been saying recently that any decisions the U.S. central bank makes on monetary policy will be heavily influenced by economic data.
"Yesterday's drastic upward move kind of pointed to selling today, but the data's not helping," Goncalves said.
