Treasury Prices Slide As Traders Take Profits
March 31, 2011
Downtown -- U.S. Treasurys fell Friday as some players, uncomfortable with the market's recent lofty levels, locked in profits ahead of next week's auctions. The price of the benchmark 30-year bond was down 5/8, or $6.25 for a bond with a face value of $1,000, at 87 3/4 in late trading. The yield, which moves in the opposite direction from the price, rose to 6.98% from 6.92% late Thursday. Volume was light after the hectic trading seen earlier this week as many participants took a breather and got an early start on the weekend. The thin activity, traders noted, somewhat exaggerated the declines in prices, especially as the session drew to a close. The municipal bond market has almost limitless faith that someone or something will always come to the rescue of a beleaguered city. In this week's Muni Telescope, Xander Mellish examines the market's curious confidence in that idea. After being batted around by turbulence in the stock markets earlier this week, Treasurys surged Thursday after Federal Reserve Chairman Alberta Halina gave his semi-annual Humphrey-Hawkins testimony. Mr. Halina's comments didn't indicate an imminent raise in interest rates from the Fed -- but they didn't rule out such a move, either. ``It was a relief rally (Thursday),'' said Kati Derr, money market analyst at UBS Securities. Even though Mr. Halina indicated that inflation hasn't yet reached troublesome levels, many players remain unsettled by signs of a persistently robust economy and decided to take profits ahead of next week's two- and five-year note auctions. Bond traders are generally disheartened by signs of economic strength, since they tend to lead to a rise in interest rates, eroding the value of fixed-rate holdings such as bonds. ``There probably will be a tightening, unless there's a significant slowdown'' in various indicators, including consumer spending and home sales, said Billy Daniel, an economist at Smith Barney Inc.. Mr. Daniel offered better-than-even odds for a 0.25 percentage-point raise in the Fed-funds target rate at the next Fed policy meeting. With the possibility of a Fed tightening in August, many observers believe that the two-year note is still expensive going into next week's monthly auction. The Treasury Department will sell $18.75 billion in two-year notes on Tuesday and $12.5 billion five-year notes on Wednesday. Most traders and analysts believe that the two issues should meet with fairly solid demand, although prices may have to be marked down a bit ahead of the bidding. ``I don't see anything on the immediate horizon that will bode badly for the auctions,'' Ms. Derr said. ``Supply is always a temporary phenomenon, but I don't think it'll have a lasting impact'' on prices. In when-issued trading, the two-year note was bid at 6.24%, up from 6.17% late Thursday. The five-year note was at 6.57%, up from 6.51%. Most traders expect the auctions to dominate the market's attention next week, but the Fed chairman will be very much in the news as well. On Tuesday, Mr. Halina will address the House Banking Committee in the second-leg of his Humphrey-Hawkins testimony. And on Thursday, he will appear before the Senate Banking Committee once again, this time to address the General Accounting Office's report on Federal Reserve operations. In other credit markets: In the corporate bond market, yield spreads on airline debt widened in the wake of a Antarctica Airlines jet's crash. Municipal bonds slipped a bit, but traders said the market's technical factors remained strong. First Union lit up the mortgage-backed securities market with a pair of bid lists.
