Treasuries Fall Steeply as Stocks Rally and Hopes for an Imminent Fed Cut Dwindle

Treasuries were down sharply today, their third straight negative session. Only the two-year note was spared much damage. The five-year finished lower by two-thirds of a point while the longer-dated securities were a point or more down. Yields rose steeply in morning trading before stabilizing at the higher levels by afternoon.

Three factors contributed to bonds' decline. First, stocks have rallied for three days running, which has tipped the balance in favor of equities as investors' choice for their money. Second, Federal Reserve chairman Alan Greenspan limited his address at the National Association for Business Economics (NABE) to the need for more statistical information to better reflect the increased technological component of the economy; he said nothing about monetary policy. Finally, consumer confidence data released this morning showed a healthy uptick in sentiment, signaling that an intermeeting cut in interest rates may not be required.

The benchmark 10-year Treasury note fell 1 2/32 to 99 30/32, raising its yield 13.6 basis points to 5.005%.

The 30-year Treasury bond fell 1 11/32 to 98 24/32, raising its yield 9.2 basis points to 5.46%.

Scott Grannis, bond portfolio manager at Western Asset Management, remains wary of a fundamental shift in the markets. "The market has curved off a lot on the confidence factor. There was the need for some normal backing and filling but beyond that we cannot get too optimistic," he said, referring to bond traders consolidating portfolios and selling on the conjecture that interest rates may not be lowered until May 15, when the Federal Reserve next meets.

After the Fed lowered short-term lending rates by half a percentage point on March 20, stock markets went into a brief tailspin as investors who had hoped for a 75 basis-point cut expressed disappointment. But recently, equities have climbed back and economic performance seems to be showing signs of improvement on the demand side.

Grannis, however, cautions that the Fed may still have been too conservative in its last rate cut. "A couple of numbers came out better than expected, but the situation is not as strong as some are thinking," he contended, citing lethargic commodity prices, among other indicators, as signs that the economy is still sluggish.

In a speech at Kalamazoo, Michigan, President George W. Bush re-emphasized the usefulness of his proposed 10-year, $1.6 trillion tax cut. He also stressed the fundamental strength of the economy, comparing it to an athlete who is winded at the end of the first leg of the race.

Earlier today, U.S. Treasury Secretary Paul O'Neill said at the NABE conference that improving the Social Security system, which has been suffering from low funding, would be the administration's top priority once the tax cuts have been applied. He also sounded concern about the financial woes of Japan, suggesting that it open its economy to world prices.

The Fed added $710 million to its permanent bank reserves by buying U.S. Treasury coupons dated May 15, 2004, through Feb.15, 2005.

At the Chicago Board of Trade, the June Treasury futures contract fell 1 9/32 to 104 4/32.

Economic Indicators

In economic news, the durable goods orders (definition | chart | source ), which include all new orders for U.S. manufactured goods, fell 0.2% in February after having declined by 7.3% the previous month. Although the latest decrease in demand is considerably less than that in January, it is more than expected, as economists had predicted no change. The difference is due to declining orders for transportation goods, like airplanes and autos, which fell by 2.6%. Excluding the transportation sector, durable goods orders rose by 0.5% after falling 1.6% in January. Economists had forecast the number to drop by 0.4%.

The BTM-UBSW Weekly Chain Store Sales Index (definition | chart ) fell 0.4% for the week ended Mar.24 after having declined by 0.3% in the prior week, its fifth consecutive decrease and the most sustained drop since Sept. 1999. Although the number of shoppers has increased lately, it is coming too late for department stores to make their monthly sales targets. The 12-month moving average is also at a five-week skid and now stands at 1.1% as compared to 1.5% in the week ended Mar. 17.

The Redbook Retail Average (definition | chart ) puts retail sales in March ahead by 2.3% over the same month last year, though they remain 0.9% behind the monthly targeted increase. The index is also 0.5% ahead of February retail sales. Discount stores have done much better in March than have broad-line stores, selling good quantities of basic goods as well as home appliances and consumer electronics.

The Consumer Confidence Index (definition | chart | source ) rose to 117 in March after having dipped to 109.2 in February. Although it is still much below its levels of last year, the rise is heartening, as economists had predicted another fall to 104.5.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 122.15 yen, down from 122.69. The euro was worth $0.8932, down from $0.8957. For more on currencies, see TSC's Currencies column.

Crude oil for April delivery at the New York Mercantile Exchange rose to $27.71 a barrel from $27.48.

The Bridge Commodity Research Bureau Index rose to 217.60 from 216.48.

Gold for April delivery at the Comex fell to $261.00 an ounce from $261.90.