Treasuries Slump Anew, Producing New High Yields

The nightmare continues in the Treasury market.

Prices slumped again, lifting yields on most benchmarks to new highs for the year, even as stock prices sagged. Lately, trouble in the stock market has benefited Treasuries as investors shift money from one asset class to the other.

It's possible -- some say likely -- that without the selloff in stocks, the selloff in bonds would have been even worse. The benchmark 30-year Treasury bond ended the day down just 9/32 at 96 29/32, lifting its yield 2 basis points to 6.36%. Shorter-maturity note yields were unchanged to 2 basis points higher.

The Treasury market reacted negatively to inflation information in the Philadelphia Fed Index, a regional manufacturing indicator that offers the earliest read on the sector. The overall index itself was market-friendly, detecting a pullback in manufacturing activity in October. It fell much more than expected, to 6.9 from 17.6 in September. Positive readings indicate growth; negative ones, contraction.

However a sub-index measuring prices paid by Philly manufacturers shot up from 11.8 to 22.5, its highest reading since October 1995. The evidence of rising inflation pressured bond prices by stirring up fear that the Fed will hike interest rates again at its next meeting on Nov. 16.

It might, but the Philly Fed Index shouldn't factor into the decision, some analysts say. The market reaction to the report was far more indicative of the Treasury market's bearish state of mind.

Michael Moran, chief economist at Daiwa Securities, pays little attention to the Philly Fed Index because it's volatile and doesn't correlate well with other manufacturing measures. The market's reaction to it, he said, "tells you the market is very nervous about further Fed tightening and concerned about the inflation situation, even though we had a great reading on the [Consumer Price Index] this week." (The relatively benign CPI was reported on Tuesday.) Behind its anxiety: Rising commodity prices, rising import prices and economic recovery overseas, Moran says.

"The market refuses to maintain a bid," in spite of the fact that many long-term investors see good value in Treasuries at current yield levels, complained Michael Pianin, vice president at ING Futures & Options. "The daytrader types are still trying to unload at higher prices.

"Ultimately, that's pretty bearish," Pianin continued. "The end of the bear market might be pretty violent."

He says the market can't hold a bid because of rising concern about the inflation outlook. Another Fed rate hike might take care of that concern, but until it happens, it's "the big, bad event" that's keeping the bond market from rallying.

By the same token, he figures bonds would have done far worse today had stocks not sold off. The logic being that if IBM's (IBM) profit-warning is a sign of things to come for the tech sector as a whole, "it will definitely slow the economy."

The midday pricing of a large corporate new issue -- a $5 billion, 10-year offering by Ford (F) -- also sapped demand for Treasuries today.

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