Stock Market's Continuing Struggles Bolster Treasury Prices

Treasury prices closed higher after another day that saw stocks suffer. As equities entered bear-market territory in the early session, fixed income was the beneficiary of new investments with the long end of the market leading the surge. Yields of the two-year note were the most sensitive to price fluctuations. Others remained relatively flat but all touched their two-and-a-half-year lows during midday.

The benchmark 10-year Treasury note rose 8/32 to 102 1/32, lowering its yield 3.4 basis points to 4.74%.

The 30-year Treasury bond rose 11/32 to 101 23/32, lowering its yield 2.3 basis points to 5.259%.

There had been suggestions by analysts last week that the stock market had capitulated in the sense that all short-term investors had sold their holdings, and therefore the inversely moving Treasuries had crested their near-term cycle as well. In the light of fresh stock meltdowns, the money market may be ready to set forth on a fresh buying cycle.

Gary Pzegeo, vice president and portfolio manager at Evergreen Investment Management, explains: "Liquidity is usually a precondition for a market rally, and there is quite a bit of excess liquidity right now. If we get continued weakness in stocks, then after a while investors will emerge from a risk-aversion mode."

"At that stage, people will get tired of the low rates at the short end of the yield curve and begin buying longer-duration bonds. Those will give them higher yields yet will remain safe investments," he added. A little bit of that was in evidence today.

The Standard & Poor's speculative grade index, which traces the difference between the yields of government and speculative bonds, is widening again as investors lose faith in any immediate economic turnaround. The greater spread results from companies floating debt at higher rates of interest to attract enough investors.

Asked if corporate debt will continue to be issued at the record-breaking pace that has been set in January and February, Pzegeo cautioned, "The surge in corporate issuance has been due to a couple of major factors. First, funding rates of corporate bonds have been low lately because companies try to match the benchmark. And second, corporate issuance was at a record low late last year. So it has been in a catch-up mode during the last two months."

He also said that economic weakness may adversely affect corporate performance and lower debt floats to smaller quantity. "Lower capitalization and a drop in consumer spending will make companies reluctant to go for more capital investment. And that will decrease the supply of fresh corporate debt."

Meanwhile, the Treasury department has completed its buyback of $1.75 billion of government bonds maturing between Feb. 2023 and Aug. 2027. The low response from sellers, as indicated by an offer-to-cover ratio of 2.14:1, suggests that institutional and retail bondholders preferred to hold on to fixed-income assets as equities lose all semblance of stability. They also want to keep their bond inventories high so they can actively resell in the presently robust Treasury market.

Cut Those Rates

Speaking to Reuters in Prague, Nobel Prize-winning economist Robert Mundell predicts that the American economy will contract for three consecutive quarters this year. A recession is often defined as six straight months of negative economic growth. Mundell would like the Federal Reserve to cut interest rates to 4%. The fed funds rate was lowered to 5% two days ago at the conclusion of the latest monetary policy meeting.

According to Pzegeo, equity performance is a big part of the Fed's equation, along with consumer sentiment and the state of the general economy. "The Fed will continue to supply liquidity until it sees it being grabbed and turned into investment," he said.

Looking at current lending rates in a more global perspective, he thinks that while it is true the European Central Bank remains a step behind the U.S. Fed's easing cycle, the macro situation lags that of the U.S. as well, and that eventually it will fall in line.

Japan is a different story, with the Bank of Japan having "essentially run out of basis points." The BOJ cut the interest rates to zero last week. Pzegeo is confident that there will be other corrective options available. "The problems are not that different but the solutions will be," he said.

At the Chicago Board of Trade, the June Treasury futures contract rose 17/32 to 106 28/32.

Economic Indicators

In economic news, initial jobless claims (definition | chart | source ), which track the number of unemployed filing for first-time benefits, fell to 379,000 in the week ended March 17, down by a thousand from the number in the prior week. The reading is above the 372,000 that economists had forecast in the Reuters poll. The four-week moving average rose to 377,000 from 365,500, its highest level since mid April 1996.

The index of leading economic indicators (definition | chart | source ) fell by 0.2% in February after having risen by 0.5% in the previous month. The composite monthly value forecasts the state of the economy for the next six to nine months.

The Consumer Comfort Index (definition | chart ) fell by five points, to 5, in the latest poll. The gauge, which reflects the opinions of consumers on the economy, their buying patterns and personal finances, is now 20 points below its 12-month average and 29 points below its highest level for that period.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 123.46 yen, up from 123.37. The euro was worth $0.8878, down from $0.8958. For more on currencies, see TSC's Currencies column.

Crude oil for April delivery at the New York Mercantile Exchange fell to $26.62 a barrel from $26.80.

The Bridge Commodity Research Bureau Index slipped to 213.16 from 213.82.

Gold for April delivery at the Comex fell to $261.10 an ounce from $261.90.