A Turbulent, Yet Flat, Morning for Bonds

The Treasury market is being pushed around by a number of factors this morning. Dealers have been buying ahead of the AT&T (T Quote) bond offering, which the company increased in size by $1 billion, to $8 billion. In addition, news that the U.S. was unable to reach an agreement with Yugoslavian President Slobodan Milosevic has caused knee-jerk buying in the short end of the Treasury curve.

Lately the 30-year Treasury bond was up 1/32 to 95 13/32, yielding 5.57%.

Wire services reported that U.S. negotiator Richard Holbrooke is leaving the Balkans, having failed to persuade Milosevic from continuing to attack Kosovo. NATO air strikes against Yugoslavia are expected. The 30-year bond traded off on this news, but the short end of the curve saw buying, partially due to the weakness in stocks. The Dow fell to its then-lowest levels on the day on this information. Lately the five-year bond was up 4/32, yielding 5.10%.

AT&T is going to price its $8 billion bond issue around noon EST, and there's been some buying in Treasuries, as dealers expect that hedges put on before the deal will be unwound later in the day. The underwriters, Merrill Lynch and Salomon Smith Barney, put on rate-lock trades, which involves selling Treasuries while marketing, and then buying back Treasuries as the corporate bonds are sold. Other dealers attempt to profit from the expected buying by front-running, or buying Treasury bonds before the expected buying.

"The market is pretty well prepared for the rate-lock unwinds but apprehensive of what retail is going to do" after the sale, said Ken Logan, managing analyst at Thomson Global Markets. "There's going to be front-running. Once we get beyond that, it's going to be back to the basics."

After the buying associated with the AT&T deal dies down, the market may come under a bit of pressure in response to OPEC's decision on production cuts. The world's oil producers signed an agreement today to cut oil production by 1.7 million barrels a day. Oil prices were mildly lower this morning. Since OPEC agreed in principle to undergo cuts a few weeks back, commodity traders had these cuts factored into trading already. Lately crude oil was down 19 cents to $15.55.

"All things being equal, if stocks don't go down 200 points, I think you'll see some selling," Logan said. In addition to rising oil prices, Logan cited the $15 billion two-year Treasury auction scheduled for tomorrow and the 10-year Japanese government bond auction tomorrow as potential dampening factors.