Treasuries Close Lower As Stocks Build on Friday's Rally

Treasury prices finished lower for the second straight session as buyers maintained their recently renewed hopes in equities, fueling a rally in the stock market that sustained its momentum from last Friday. The money market had been under pressure from the opening bell, as stock index futures hinted of another good day for equities after exchanges in Europe and Asia had posted substantial gains overnight.

The correspondingly lightened investment flow toward fixed income hit hardest at the long end, with the 30-year Treasury losing close to a point in value. Yields for both notes and bonds climbed markedly. That of the two-year note was volatile throughout the day.

The benchmark 10-year Treasury note fell 14/32 to 101, raising its yield 5.6 basis points to 4.869%.

The 30-year Treasury bond fell 28/32 to 100 2/32, raising its yield 5.8 basis points to 5.369%.

The Standard & Poor's speculative grade index, which tracks the difference between the yields of Treasuries and corporate bonds, narrowed on Friday after having widened over the last two weeks. With investors feeling less sure of the economy as reflected in some heavy selling in equities, companies had been floating debt at higher rates of interest to attract buyers. However, a resurgence in equities leads some to think that stocks have bottomed. The spread of corporate bond yields over government bond yields was 9.725% at Friday's close.

The president of the Philadelphia Fed, Anthony Santomero, has said that economic growth should bottom out in either the first or the second quarters. Speaking to reporters after addressing the Downtown Economists Club in New York, Santomero, who will not be voting at the Federal Reserve's monetary policy meetings this year, admitted that the slowdown was greater than anticipated but added that it "allows for a more rapid adjustment of inventories." He said that the effect of such "classic inventory correction" was currently combined with other factors such as unstable energy prices and the "re-evaluation of the market."

He also defended the recent half-percent point cut in interest rates by the Fed last week, a move that has been deemed insufficient for increasing cash flow by many analysts. Santomero agreed that expectations matter and the real impact of sharp shifts must be dealt with more expeditiously. But he countered that the game would turn "dangerous and destabilizing" if the Fed revised policy "for the sole purpose of boosting expectations or merely to affect confidence."

A survey by the National Association for Business Economics, completed earlier this month, shows that a growing number of U.S. economists feel that the Fed has not been aggressive enough in lowering interest rates to encourage the economy. Although 56% think the central bank's policy is "just right", this is the lowest proportion of such experts concurring with the Fed's strategy in the last five years.

"To deal prudently with the uncertainties on both the supply side and demand side of the economy, as well as the dynamics of monetary policy, monetary policy ought to move in careful increments and at a measured pace," Santomero said, asserting that the central bank should not be swayed by the "incessant demand for instant reaction and the expectation of instant results."

Santomero's words may well presage the stance that Federal Reserve chairman Alan Greenspan assumes when he addresses a national business conference in Washington this week. It will be his first public comment after the latest interest rate decision of March 20.

Michael Mussa, chief economist of the International Monetary Fund, said today that the IMF has lowered the annual growth rate of the global economy to a "little over 3%" after having predicted a 4.2% rate last September. Speaking at the National Association for Business Economics, Mussa expects growth to resume at a "more rapid pace in 2002" but warned of that prospect eroding every time the stock market suffers a big loss. His team calculates the U.S. growth to keep a 1.5% to 2% rate this year, and also forecasts that the American Fed will cut interest rates by 50 basis points in mid-May and by another 50 points by the end of summer.

Mussa's comments take on more urgent meaning since this is the first time in about 30 years that all of the world's major economic powers are performing below par at the same time. Presently, the second largest economy, Japan, is struggling to come out of a recession while the U.S. remains in danger of sinking into one.

Earlier today, White House spokesperson Ari Fleischer said that President George W. Bush will give a speech in Michigan tomorrow in which he will outline his plan for economic recovery. "The president knows we're in the middle of an economic downturn, but he has faith that the long-term strength of the economy is solid," Fleischer added.

Belgian finance minister Didier Reynders is worried about the "psychological impact" of the U.S. economic slowdown on the euro zone. Speaking to Belgium's RTBF radio, Reynders said he does not fear the repercussions on the European economy but is concerned about the effect on the "players in the economy" like the financial markets and the consumers.

At the Chicago Board of Trade, the June Treasury futures contract fell 23/32 to 105 13/32.

Economic Indicators

In economic news, the sales of new homes (definition | chart | source ) fell for the second straight month. They were down 2.4% in February to 911,000 units sold, from a revised number of 933,000 units sold in January. Economists were expecting a decline, though their average estimate as calculated in a Reuters poll was 915,000.

Existing home sales (definition | chart | source ) were down by 0.4% in February after having risen by 5.3% in the previous month. However, the number of 5.18 million remains above economists' projected decrease to 5.04 million.

As compared with the rest of the economy, the nation's housing market has remained strong, mainly due to low mortgage interest rates. The 30-year mortgage rate was 6.89% last week. This marked the third straight week in which rates were under 7%, a threshold that encourages home purchases. On a 12-month comparison, new home sales are up by 0.7%.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 122.67 yen, barely down from 122.68. The euro was worth $0.8959, up from $0.8898. For more on currencies, see TSC's Currencies column.

Crude oil for April delivery at the New York Mercantile Exchange rose to $27.45 a barrel from $27.30.

The Bridge Commodity Research Bureau Index rose to 216.48 from 214.47.

Gold for April delivery at the Comex rose to $261.90 an ounce from $261.50.