Short-Term Treasuries Tick Higher After Latest Data
The Treasury market was mixed around 4 p.m., with strength focused on the shorter maturities, as the market digested the latest signs of economic softness and additional corporate profit warnings.
The two-year note, the security most affected by expected changes in monetary policy, recently gained 1/32 to 100 16/32, lowering the yield, which moves inversely to the price, to 3.980%. The two-year yield is now below the
fed funds rate of 4%. The last time that happened was in October 1998 during the height of the worldwide financial crisis.
On the inflation-sensitive longer end of the market, the 10-year benchmark note was lately flat at 98 8/32, yielding 5.230%, while the 30-year Treasury bond lost 6/32 to 95 24/32, moving the yield up to 5.667%. Treasuries started out strong but gave up some gains by midday, as the long bond fell into negative territory.
"It looks like people want to stay short," said Vincent Verterano, head of government bond trading at
Nomura Securities
, calling the shorter-dated securities a "safe haven" for investors fleeing the stock market, which was hit in the last 24 hours by profit warnings from
Nortel
(NT)
and
JDS Uniphase
(JDSU)
.
Verterano said he believes the prices of shorter-dated Treasuries will "keep on going" over the next few weeks, even though he doesn't expect short-term yields to fall "too low."
Many market observers have been looking for a 25-basis-point rate cut when the
Federal Reserve meets June 26-27, but following the latest economic data, some investors are now expecting an even more aggressive action. The July
fed funds futures contract is now pricing in about a 40% chance
Alan Greenspan and his team of central bankers will lower short-term interest rates to 3.50% when they next meet, up from a 23% chance at Thursday's close.
Today's
industrial capacity and production figures, released by the Fed, underscored the weakness in the manufacturing sector. The
data showed that industrial production contracted for the eighth straight month, dropping 0.8% in May, weaker than the consensus forecast of a 0.4% decline. April's industrial production was revised down to a 0.6% decline, compared with the previous estimate of a 0.3% drop. Manufacturing output declined 0.7%. Excluding motor vehicles and parts production, manufacturing dropped 0.9%.
As for inflation, experts said the prospect of higher prices was benign, as evidenced by the latest
consumer price index and
producer price index reports, and wouldn't prevent the Fed from aggressively cutting rates. The CPI, released by the
Labor Department
today, rose 0.4%, as expected, while yesterday's PPI rose just 0.1%, while economists expected a 0.3% increase.
"The
manufacturing numbers were extremely weak, indicating a lot of slack in the economy," said David Coard, principal and head of fixed income sales and trading at
Williams Capital Group
. "It makes it easy for the Fed to make its move without having to be concerned about inflation. I think the Fed's going to move by 50 basis points on the 27th."