Treasuries Skid Again as Stocks Stabilize
August 22, 2002 10:56:00 AM ET
By Wayne Cole
NEW YORK (Reuters) - U.S. Treasuries skidded for a second straight session on Thursday as signs of stability in equity and corporate bond markets further eroded hopes for a cut in official interest rates.
Bulls were already nursing a grudge after a trio of top Federal Reserve officials hinted policy would not be eased again even if economic growth stayed sluggish.
Now, equities in Europe were enjoying another upbeat session while debt markets there were pressured by a surprisingly strong German gross domestic product report. (hehe, die amis schauen mal auf "uns"... ;)
Wall Street was also working up a lather with the Nasdaq and Dow Jones industrials adding to Wednesday's healthy gains.
With the S&P 500 up 20 percent in the past month and tentative signs of returning demand for corporate debt, the risk of a financial meltdown has diminished and with it the need for urgent Fed action.
Traders also reported Treasury selling linked to the sudden revival in corporate bond issuance. Some $2.5 billion in new debt hits the market Thursday on top of $3.0 billion on Wednesday and dealers had hedged it by selling Treasuries.
This was a bearish development since not only was the splurge of corporate issuance competing for investor cash, it also countered concerns of a credit crunch.
The corporate debt market had all but seized up in recent weeks as shares slid and accounting worries wracked investors. That threatened to curb already weak business investment and was one reason analysts thought the Fed might have to ease policy.
Now with corporate debt flowing again, albeit only for investment grade issues so far, some of the urgency for a rate cut looks to have faded.
That was reflected in the Eurodollar market where the September future (EDU2) has fallen back to reflect little chance of a move at the Fed policy meeting on Sept. 24 when a few weeks ago a cut had been almost completely priced in.
Treasury yields have also had to back away from recent historic lows, though the retreat has not been as dramatic as some expected, thanks in part perhaps to seasonal illiquidity.
On Thursday, prices on two-year notes (US2YT-RR) were 3/32 easier at 100-6/32, lifting yields to 2.15 percent from 2.10 percent late Wednesday.
Five-year notes (US5YT-RR) dropped 8/32 to 99-21/32, which pushed yields up to 3.33 percent from 3.27 percent, while the 10-year note (US10YT-RR) lost 18/32 to 100-27, taking yields to 4.27 percent from 4.20 percent.
At the long end, 30-year bonds (US30YT-RR) shed a full point to 104-12/32, sending yields to 5.08 percent from 5.02.
STILL JOBLESS
Data on U.S. jobless claims were generally bond-friendly since they pointed to a subdued August labor report, though perhaps not one dire enough to shake the Fed's stubborn economic optimism.
``The payrolls figures look set to be soft and we suspect the true jobs picture is worse than the numbers tell,'' said Cristoph Bianchet, U.S. economist at Credit Suisse Asset Management. ``But the Fed seems confident it's already done enough on policy and all will be well in the end.''
Claims dipped to 389,000 in the week ended Aug. 17 but that was from an upwardly revised 391,00 the week before and compared with market forecasts of 386,000.
Analysts noted this data covered the week when the survey for the national payrolls figures was taken and compares with claims of 383,000 in the week the July survey was conducted.
The August jobs number are out September 6 and today's numbers suggest a subdued result with some analysts tipping no growth at all in employment and a rise in the jobless rate.
However, that would still not be weak enough to force the Fed's hand and so satisfy bond bulls, said Bianchet.
But all was not lost.
``For us, the end of the year is likely to be more interesting,'' he said.
``By then the mortgage refinancing wave will have petered out; zero percent financing on cars should be over; income growth will be slowing. That's when we think the Fed will have to ease,'' he argued.
© 2002 Reuters
thank you, america!
