Treasuries Close Higher Along With Equities

Treasuries continued to attract buyers even as stocks turned around in the second half of the trading session today. The long end of the money market led the robust performance, while yields for the notes dipped back near their 30-month lows.

With most money managers squaring out their portfolios (in other words, rounding off portfolio targets) for the end of the quarter, fixed-income securities had a strong case for being the safer and more reliable investment vehicle. At the closing bell, only the two-year note had failed to make substantial progress, although it remained positive.

The benchmark 10-year Treasury note rose 20/32 to 100 20/32, lowering its yield 8 basis points to 4.919%.

The 30-year Treasury bond rose 23/32 to 98 29/32, lowering its yield 5 basis points to 5.449%.

Asked if bonds were breaking out into a new pattern, David Ging, Treasury market strategist at Credit Suisse First Boston, feels that such a suggestion is premature. "What one can say is that the market has certainly found the bottom of its range, and is in better shape going forward," he notes.

A major reason for the Treasury rally today is the increased likelihood that the Federal Reserve will cut interest rates before its May 15 meeting. Such a possibility became plausible again after this morning's discouraging manufacturing news.

"The Purchasing Managers' Index (definition | chart | source ) on Monday will tell if the weakness shown in today's Chicago Purchasing Managers' Index (definition | chart ) is going to last," said Ging, referring to the broader measure of manufacturing health.

The current April fed funds futures contract shows a 40% chance of interest rates being lowered in that month. There is also a greater possibility now that the Fed will cut rates by 75 basis points at its next monetary policy meeting in mid-May if it doesn't take action within the next four weeks.

Ging adds that the full range of economic results over the next week will determine if Fed easing is going to occur in early April. "and the same kind of reasoning holds through April for the chances of a 75 basis-point cut in May," he said.

At the Chicago Board of Trade, the June Treasury futures contract rose 9/32 to 104 6/32.

Robert McTeer, president of the Dallas Fed, commented today that economic weakness is largely confined to the manufacturing sector. Otherwise, he asserted, things are holding up "reasonably well." He also downplayed inflation risks as he talked with KRLD radio of Dallas-Forth Worth, saying that he would be "willing to put inflation fears on the back burner" as long as recession remained a close call.

McTeer, a nonvoting member of the Federal Open Market Committee (the Fed's policy-making arm) added, however, that cutting interest rates between the scheduled meetings of the central bank was "bad play."

The yield curve, which traces the yields of notes and bonds along the dateline of their maturity, has widened considerably. Yesterday, the spread between the yield of the two-year note and the 30-year bond was 119.5 basis points, or 1.195%, in favor of the latter. Currently, it stands at about 1.25%. It has been five years since the spread has been consistently above 120 basis points, and, significantly, that was at a time when a series of interest rate cuts was coming to an end.

The speculative grade index, tracked daily by Standard & Poor's, finished at 958.8 basis points yesterday. The difference between the yields of government and speculative bonds varies as investors alter their willingness to take on risky debt. When stock prices have fallen, corporate issuers of debt offer bonds with yields sufficiently high enough to attract buyers. The index has narrowed and widened with the fall and rise of the stock market, the progress of which has been in turn affected by the easing curve on interest rates.

After buying back $710 million of its debt three days ago, the Treasury moved to purchase notes that will mature between May 2005 and August 2009. In this latest coupon pass, $799 million will be added to the Treasury's permanent banking reserves. All this is part of the department's strategy to hold a greater amount of short-term debt. In doing so, it can prevent the rollover of the System Open Market Account into Treasuries in its entirety.

Economic Indicators

In economic news, personal income (definition | chart | source ) rose by 0.4% for February after having risen by 0.5% in the previous month. This figure was slightly higher than the expected target of 0.3% that economists had predicted in the Reuters poll.

Personal consumption data met expectations, the number advancing by 0.3% for the month. More significantly, it is still growing after a 1% spike in January and that bodes well for the economy as consumer spending affects two-thirds of the nation's GDP growth. The growth has been maintained by the sales in durable goods and services.

The Chicago Purchasing Managers' Index (definition | chart ) fell to 35 for March after having risen to 43.2 in February. This is its lowest level since March, 1982. Manufacturing therefore continues to be very weak. The gauge has not gone above 50 since last September. A number below 50 signifies contraction in the manufacturing sector.

The Consumer Sentiment Index (definition | chart ) rose to 91.5 for March, above economists' forecast of 90.2. This is yet another piece of data in the string of reports reflecting a relatively healthy amount of optimism on the part of the consumer.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 126.16 yen, up from 123.13. The euro was worth $0.8778, down from $0.8825. For more on currencies, see TSC's Currencies column.

Crude oil for April delivery at the New York Mercantile Exchange was unchanged at $26.32 a barrel.

The Bridge Commodity Research Bureau Index fell to 210.28 from 213.55.

Gold for April delivery at the Comex was unchanged at $259.70 an ounce.