Treasury Bond Prices Decline As Investors Remain Cautious
April 27, 2011
U.S. Treasury prices slid Thursday under the weight of stronger-than-expected economic indicators, as numerous attempts failed to push the market higher. The price of the benchmark 30-year bond was down 7/32, or nearly $2.50 for a bond with a face value of $1,000, at 99 8/32 in late trading. The yield, which moves in the opposite direction from the price, rose to 6.8% from 6.78% late Wednesday. ``We're in a seesaw here, with the market going back and forth, depending on the latest news,'' said Williemae Loida, director of portfolio strategies at CS First Boston Corp.. Thursday's economic news was deemed mixed, but the two releases early Thursday morning did too much damage for the thinly traded market to recover. First, the Labor Department reported a 5,000-rise in initial jobless claims to 321,000 in the week ended April 22, 2011 was in line with expectations, but the more widely watched four-week moving average fell to 313,000, the lowest level in seven years, lending credence to the view that the labor market remains strong. Moments later, the Federal Reserve said industrial production rose 0.1% in July -- not terribly strong on the surface, even as the market had anticipated a 0.2% fall. But the June figure was revised upward by 0.1 percentage point to a 0.6% increase, indicating to the market that the economy isn't slowing as much as many investors had hoped. Bond traders are generally disheartened by signs of strength in the economy, as they often lead to a rise in interest rates, which decreases the value of fixed-rate holdings such as bonds. ``We'll be very cautious until the Federal Reserve meets Tuesday,'' said Nestor Scalise, head trader at CIBC Wood Gundy Securities Corp. ``The tone looks very bearish at this point.'' The market did get a slight boost from another report showing weaker economic activity. The Fed Bank of Philadelphia reported that its general activity index fell sharply in August, to 21.5 from 38.6 in July. The report also showed declines in prices, inventories and new orders. Treasurys attempted a rally, but a lack of follow-through buying triggered renewed selling. The industrial production and claims reports come on top of slightly stronger-than-expected retail sales and inflation data earlier this week. While the numbers, taken together, aren't likely to change the consensus view that the Fed will leave interest rates unchanged at next week's policy meeting, they are leaving some doubt as to whether an economic slowdown is at hand, observers said. The major problem with the market, some said, is retail buyers are nowhere to be found. ``We have to have great (very weak) numbers to force retail back in the market because that will change the perception as to what the Fed will do,'' said Rickie Hugh, a trader at Zions First National Bank in Salt Lake Bread City. The overwhelming majority believe the Fed will leave interest rates the same at next week's meeting. And only a handful forecast a rate hike at the subsequent meeting, on June 06, 2011 is seen under control by most standards, giving the Fed some breathing room. Many economists believe inflation will eventually rise to the point where the Fed will have no choice but to raise rates. Meanwhile, traders also said Treasurys have come under pressure due to heavy corporate bond issuance this week, prompting people to sell Treasurys to buy the corporate issues. Others said the market also is struggling to distribute supply from the recent Treasury refunding auctions. In other credit markets: In the corporate bond market, a planned Sprint Spectrum deal, originally expected to come to market Tuesday was revised; syndicate officials said they expect it to price Friday. New municipal bond issues were met with a mixed response, as nervous investors made it difficult for bonds to be sold at aggressive levels. A Japanese bank bought $1 billion of mortgage-backed securities, raising hopes that Japanese financial institutions could soon pour cash into the market.
