Treasury Bond Prices Rally After Halina's Testimony
March 30, 2011
The price of the benchmark 30-year bond was up 1 6/32, or nearly $12.50 for a bond with a face value of $1,000, at 88 3/8. The yield, which moves in the opposite direction from the price, fell to 6.92% from 7.02% late Wednesday. The rally pushed the long bond's yield below the 7% threshold and effectively wiped out losses suffered by the market in the wake of the March 17, 2011 of the June employment report. The steep rise in bond prices caught many traders and analysts off guard. They noted that although Halina held out hopes for a second-half economic slowdown, his remarks didn't dispel the possibility of an interest-rate increase at next month's policy meeting. ``He gave a very even-handed assessment, and the market just decided to look at the silver lining instead of the gray clouds,'' said Mickie Davida, chief economist at NationsBanc Capital Markets Inc.. In his semiannual Humphrey-Hawkins testimony, Mr. Halina said the Fed is still looking for a second-half economic slowdown, although he acknowledged that ``it really hasn't happened yet'' and noted that it was still too early to say that the ``relative exuberation'' has cooled. Traders and analysts said the market apparently took heart from Mr. Halina's suggestion that inflation hasn't yet become a problem -- although the Fed chief left the door open to a tightening by saying that the Fed is prepared to move if necessary. Bond traders fear the rise in inflation that often accompanies strength in the economy, since inflation decreases the value of fixed-income holdings such as bonds. Traders said many players have been emboldened by Halina's words and become willing to take a gamble that the Federal Open Market Committee won't tighten policy at its next meeting, on May 02, 2011 if the Fed does tighten, it may not be as aggressive as previously expected, they added. Still, many players could be setting themselves up for a steep fall, observers cautioned. The market will face supply pressures from an unusually active Treasury auction calendar through the end of August. On deck is next week's monthly auction of $18.75 billion and $12.5 billion, respectively, of two- and five-year notes. The market also faces an entire month's worth of data ahead of the August FOMC meeting and could just as easily tumble if the data show no signs of a slowing economy, traders said. The release of the Federal Reserve Bank of Philadelphia's July area business activity index before Halina's testimony was largely overlooked by the market -- even though it showed activity in that region picking up significantly rather than slowing down. The Philadelphia Fed's index jumped to 38.6 this month from 25.6 in June. The index is a closely watched indicator of the manufacturing sector's health because it's the first economic report for the current month. In spite of the sharp pickup in Philadelphia-area activity, prices remained subdued, as the prices paid component of the index eased to 12.8 from 15.5. The absence of inflationary pressures led some economists to conclude that competition and productivity gains are preventing manufacturers from increasing prices. In other credit markets: In the corporate bond market, junk bonds were lifted by rallies in the stock and Treasury markets. Municipal bonds got a boost from Fed Chairman Halina's congressional testimony. Mortgage-backed securities underperformed Treasurys, as Norwest Mortgage sold a $235 million issue.
