Treasuries Close Mostly Higher as Stocks Succumb to Selling

Treasury prices ended higher today though the gains were trimmed by midday as portfolio allocations shifted toward the shorter-dated notes. On the whole, however, fixed income had the upper hand in the investment toss-up against equities as more warnings on corporate results pulled the stock market down.

At the closing bell, the money market managed a comeback after having been hit for three straight days. Except for the long bond, prices finished in positive territory. Yields, which had spiked yesterday, remained relatively stable.

The benchmark 10-year Treasury note rose 7/32 to 100 5/32, lowering its yield 3 basis points to 4.979%.

The 30-year Treasury bond fell 7/32 to 98 17/32, raising its yield 1.5 basis points to 5.474%.

The Treasury department announced a buyback of up to $1 billion par of its outstanding callable issues that mature between February 2010 and November 2014.

The department also auctioned $11 billion worth of two-year notes, which was well received with a bid-to-cover ratio of 2.79:1, the highest ratio since November. The yield curve steepened as a result. The difference between the yields of the two-year note and the 30-year Treasury is now about 110 basis points or 1.1%, up by more than 65 basis points from its reading at yesterday's close.

Asked about the two-year note auction affecting the buying shift toward the short end, Josh Stiles, Treasury market strategist at IDEAglobal.com, attributed it to market players being tempted to consolidate their month- and quarter-end closings. "There was a tendency of some shortening up, which caused the steepening in the yield curve. Unfortunately, in the absence of Fed news or any significant economic data, the market was subject to day-trader gyrations, with quite a few allocation trades. I wouldn't read much into today's price action," he explained.

Tomorrow will mark the final adjustment to the fourth quarter gross domestic product (definition | chart | source ) and also bring out the latest on employment. Stiles thinks the GDP is old news but admits that the jobs data is important. "I would keep a close eye on that one. The labor market is loosening from its extremely tight levels, and something severe could be under way. If the jobless claims go above 400,000, that will mark a new period. I hope it doesn't happen," he said.

The final reading of the University of Michigan's Consumer Sentiment Index (definition | chart ), due out on Friday, is also on the radar for many. If it registers as positively as did the Consumer Confidence (definition | chart | source ) gauge, which spurred the equity market on Tuesday, then economic recovery may well be on its way, at least on the consumption side. More importantly, it will rule out any monetary policy revision by the Federal Reserve for the time being.

The Standard & Poor's speculative grade index narrowed to 946.9 basis points yesterday from 965.3 bps on Monday. The number tracks the spread between the higher-yielding corporate debt and government securities. After having widened sharply over the last two weeks, the gauge has now narrowed for three sessions in a row.

There has also been a 37% surge in home refinancing, leading to a rise in disposable income, which in turn could further spur consumer spending. However, studies show that the economic slump is not as much consumer-led as influenced by business results, with corporations having scaled back on capital equipment expenses and retrenched their other operations.

Stiles says that the beneficial effect of house refinancing nevertheless remains very important because data indicate that the "cashouts are being spent more than are being saved. With the Fed having dropped interest rates and the low mortgage financing available, it provides a nice cushion for the economy," he notes.

April fed fund futures are forecasting the chances of a quarter-point cut in interest rates next month at about 30%. During the collapse in stock market prices just after the last Fed decision of a half-point cut on March 20, the expectations of that happening were 70%. The May futures contract continues to be certain of a 50 basis-point lowering in May.

Stiles regards it as unlikely that in the absence of a stock market meltdown, the central bank will cut lending rates before mid-May.

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

Economic Indicators

The latest Mortgage Applications Survey (definition | chart | source ) shows that recent home buying activity dipped but refinancing soared to its highest level since Oct. 1998. The Purchase index was 291.6 in the week ended Mar. 23 from 299.8 in the previous week. The Refinancing index was 2802.2 in the same period, up from 2053. Both indices start from a base value of 100 in March 1990.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 122.25 yen, up from 122.18. The euro was worth $0.8856, down from $0.8930. For more on currencies, see TSC's Currencies column.

Crude oil for April delivery at the New York Mercantile Exchange fell to $26.25 a barrel from $27.75.

The Bridge Commodity Research Bureau Index fell to 214.78 from 217.57.

Gold for April delivery at the Comex slipped to $259.70 an ounce from $261.