Treasury Prices End on a Positive Note as Stocks Slip

Treasury prices ended the week on a positive note after losing value during the first three days and then staging a minor rally over the next two. Weakness in equities has brought back investors' focus to fixed-income securities. At the closing bell, the money market's strength was most evident at the longer end, with the 30-year Treasury gaining by more than half a point.

A $5 billion auction of three-year notes from Freddie Mac also helped the trading volume. There is more supply-side activity to come, with a $21 billion sale of three- and six-month Treasury bills.

The fall in price earlier in the week was primarily due to the $32 billion quarterly auction in notes and bonds, which came to a close yesterday. Such an event usually introduces excess amounts of debt into the market and consequently decreases its worth. Dealers are also inclined to go into a selling mode before the auction hour to lower the bid values of the issues.

The benchmark 10-year Treasury note rose 15/32 to 99 25/32, lowering its yield 6.1 basis points to 5.028%.

The 30-year Treasury bond rose 20/32 to 99 25/32, lowering its yield 14.2 basis points to 5.39%.

The stock and bond markets had been moving in tandem for some time, but corporate woes have once again made their relationship inverse. Personal computer manufacturer Dell(DELL Quote) is believed to be considering laying off thousands of employees and Motorola(MOT Quote) has announced that 4,000 will be let go in its semiconductor division. Moreover, according to reports, Lucent(LU Quote), another technology bellwether, is being investigated by the SEC for its accounting practices, though the company has said that this is "not new news." Such discouraging news from the business sector is likely to keep hurting stocks and make bonds the safe-haven investment vehicle.

As was the case two weeks ago, trading over the next couple of days may be subject to over-speculation about short-term monetary policy. Analysts will be hoping for Federal Reserve chairman Alan Greenspan to hint of more rate cuts when he addresses the Senate Banking Committee on Tuesday.

In the wake of the Fed's two January cuts, the Bank of England cut interest rates yesterday and the Japanese central bank followed through with a cut overnight.

Treasury Secretary Paul O'Neill said in his round of conversations with television networks yesterday that he agrees with Greenspan's recent view that the economy is near zero growth. O'Neill estimates the present growth rate at 0.5% - 0 .6%. But he expressed confidence that technology-led productivity gains would take the nation to a "golden era of economic prosperity" as 80% of their contribution is still to be realized. His statements suggest that last quarter's higher-than-expected productivity gains amid a weakening economy were due to structural improvements in supply-chain management techniques.

In his remarks to the local press, Federal Reserve Bank of St. Louis president William Poole termed the current economic slowdown as a "hiccup" in the manufacturing sector and said that "traditional signs of a recession" were not visible. But he also specified that the Fed is prepared to cut interest rates once again if the economy shows further signs of weakening.

The chiefs of the regional central banks of Chicago, New York and Dallas have made similar comments lately. Their consensus is that the manufacturing sector is experiencing major problems but that the overall economy is not quite as hurt. However, should it begin to stumble, the Fed will step in as often as necessary.

The April Fed Futures index currently puts the chances of a half-point cut in interest rates by late March at about 90%. The July contract calculates that such a correction in the fed funds rate is certain by midyear if it doesn't happen at the Federal Open Market Committee meeting on March 20, and puts the probability of a 75 basis-point lowering by June at about 80%.

At the Chicago Board of Trade, the March Treasury futures contract rose 21/32 to 105.

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 117.49 yen, up from 116.65. The euro was worth $0.9248, up from $0.9187. For more on currencies, see TSC's Currencies column.

Crude oil for March delivery at the New York Mercantile Exchange fell to $31.03 a barrel from $31.59.

The Bridge Commodity Research Bureau Index slipped to 224.34 from 224.80.

Gold for March delivery at the Comex fell to $259.90 an ounce from $260.10.