Bond Focus: Treasuries Edge Higher in Light Trading

On a day of very light trading, Treasuries had little to respond to except movements in the stock market.

After starting the morning with a loss that was a reaction to rising stocks, the prices of notes and bonds changed direction around mid afternoon as the equity market was dragged down by slumping blue chips and technology bellwethers.

According to IFRmarkets.com, which analyzes market flow, the trading volume was about half of where it stood last week. And that rate was below average. The demand for U.S. Treasuries has been lessening since Feb.13, when Federal Reserve chairman Alan Greenspan watered down hopes of another early interest rate move.

There was an exception last Friday, when Treasuries sold higher due to a very weak -- and potentially inflationary -- report on producer prices that showed them rising much higher than expected. A precipitous drop in the latest consumer sentiment reading was another reason.

The benchmark 10-year Treasury note rose 2/32 to 99 7/32, lowering its yield 1 basis point to 5.101%. The 30-year Treasury bond rose 1/32 to 98 29/32, lowering its yield 0.3 basis point to 5.452%.

The most recent Standard & Poor's speculative grade credit index, which measures the difference between the yields of government Treasuries and those of bonds rated below BBB+, was at 894.5 basis points, or 8.945%, on Friday. The difference has steadily decreased from a high of 10.74% on Jan. 2, just before the Fed began cutting interest rates to jumpstart the economy. Lower rates have generally led investors to expect the economy will recover, sending U.S. Treasury prices lower on weakening demand. This prevents yields from falling further, contributing to the narrowing of the index. Prices and yields move inversely.

There is not much critical economic news due for this week. The Consumer Price Index (definition | chart | source ) for January, set to be released tomorrow, is one of the few pieces of data that analysts will be watching out for. It follows Friday's reading of the Producer Price Index , which showed price inflation at the producer level was much higher than expected in January. Economists at Merrill Lynch, however, believe the sharp growth in PPI was a fluke and is not likely to be repeated this month. A poll of economists taken by Reuters indicates consumer prices are expected to move up only marginally.

The money market is also gearing up for an $11 billion auction in two-year notes tomorrow. On schedule as well for this week is the sale of $5 billion of corporate debt from AT&T Wireless(AWE). It will be the largest single bond-float by a corporate entity after the $6 billion offered by its parent last July, and will be distributed though five-, 10- and 30-year issues. Aetna(AET) will also introduce $1 billion worth of debt.

Government securities are likely to come under selling pressure as traders shuffle their holdings to make room for the higher yielding bonds coming from the private sector.

A recent survey by the Federal Reserve Bank of Philadelphia estimates that the U.S. gross domestic product (definition | chart | source ) should grow by about 2.2% in 2001, down from the 3.3% annual growth that had been forecast two months ago. However, this is not likely to jolt the market since most economists and regional Fed presidents have been lately pegging the growth rate at 2% to 2.5%.

According to the latest numbers, the April fed fund futures contract shows the market is accounting for an 85% probability of a half percent point cut in the fed fund rate within two months. Merrill Lynch researchers expect the Fed to have eased by an additional 25 basis points by mid-year.

At the Chicago Board of Trade, the March Treasury futures contract fell 2/32 to 103 26/32.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 115.72 yen, down from 116.04. The euro was worth $0.9117, down from $0.9217. For more on currencies, see TSC's Currencies column.

Crude oil for March delivery at the New York Mercantile Exchange fell to $28.45 from $29.16.

The Bridge Commodity Research Bureau Index slipped to 222.30 from 222.93.

Gold for March delivery at the Comex fell to $256.10 from $258.20.

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