Enough Is Enough in Treasury Market as Rally Takes a Breather

Treasuries lost ground today, as investors were unwilling to take prices any higher after a rally that had dropped some yields to new lows for the year.

Market strategists said the moderate losses resulted from a number of factors, including profit-taking, strength in the stock market and efforts to sell securities after this week's series of Treasury auctions known as the quarterly refunding. Key economic data -- retail sales and the Producer Price Index, both for July -- had little market impact.

Confidence that the Fed will hold interest rates steady this month had already been priced into the market, allowing for losses in the short-term sector, which is most directly influenced by the Fed. Meanwhile, longer-maturity securities surrendered some of the gains they made after this week's spate of auctions.

"Right now I think we're in the midst of a bout of profit-taking," said Miller Tabak chief bond market strategist Anthony Crescenzi. "The market had a good run of late to the upside, but there's some stalling in the recent rally at these levels. I think most realize that it's going to be difficult to rally from current levels, absent a rate-cut scenario."

The benchmark 10-year Treasury, which yesterday rallied to a new low yield for the year, ended down 6/32 at 99 22/32, lifting its yield 2.4 basis points to 5.791%. Shorter-maturity issues underperformed, their yields rising between 5 and 10 basis points.

The 30-year bond fell 15/32 to 107 22/32, boosting its yield 2.7 basis points to 5.708%. At the Chicago Board of Trade, the September Treasury futures contract lost 13/32 to 99 21/32.

Retail sales posted a larger-than-expected gain in July, rising 0.7%. Including automobiles, retail sales rose 0.6%. Economists polled by Reuters had forecast gains of 0.4% for each measure, on average.

Still, the report should not prompt the Fed to hike in August, according to Michael Moran, chief economist for Daiwa Securities. "Today's report was a good one for retail sales, but it was not strong enough to alter the outlook for the [Fed] meeting on Aug. 22," he wrote in a research note. "The Fed will most likely be on hold." However, Moran added, the evidence of renewed consumer vim and vigor "leaves open the possibility that the Fed may have to raise interest rates sometime in the future."

That attitude was partly responsible for the underperformance of short-maturity issues today, analysts said. "The notion that the Fed is going to be on hold is already priced into the short end, and that's limiting the rally on the short end," Crescenzi said. "There's a lot of hesitance to own short securities now." Investors also moved their money away from short-term notes to take advantage of strength in the stock market today, he added.

More broadly, the selloff was a potential sign that Treasury dealers, who this week bought $25 billion of new notes and bonds in the quarterly refunding, were having trouble unloading them, said Joe LaVorgna, senior U.S. economist at Deutsche Bank Securities. The end of the refunding, along with higher-than-expected retail sales numbers, gave traders "an excuse to sell the market," LaVorgna said, noting that prices didn't drop in advance of the refunding as much as they normally do.

Economic Indicators

The Producer Price Index came in on target, unchanged in July, after a 0.6% rise in June. The core PPI, which excludes food and energy, rose only 0.1% after falling 0.1% in June. The overall index came in below the Reuters consensus forecast for a 0.1% rise, while the core PPI matched the forecast.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It lately was worth 108.60 yen, down from 108.69. The euro was worth $0.9025, down from $0.9078. For more on currencies, see TSC's Currencies column.

Crude oil for September delivery at the New York Mercantile Exchange fell to $31.02 from $31.34.

The Bridge Commodity Research Bureau Index rose to 219.90 from 219.52.

Gold for December delivery at the Comex rose to $280.30 from $277.60.