With an assist from expiring options on bond futures, Treasury prices moved smartly higher in a holiday-shortened session, motivated primarily by falling stock prices.
The benchmark 10-year Treasury note ended up 16/32 at 100 2/32, lowering its yield 6.9 basis points to 6.491%, its best close since Feb. 3. The 30-year bond -- which has lost its benchmark status in the last month because the federal government's plans to reduce the supply of long-dated Treasury debt have driven its price up disproportionately -- ended up 30/32 at 101 10/32, dropping its yield 6.8 basis points to 6.153%. At its high for the year on Feb. 3, the bond traded at a yield as low as 6.059% on an intraday basis, and as low as 6.121% on a closing basis.
Treasuries, which except for the bond were little changed early in the session, after the release of the
Consumer Price Index
for January, started to get excited when the major stock prices encountered a fresh bout of selling around midday.
The logic of the trade was precisely the one
outlined in his
testimony yesterday: Rapidly rising stock prices are a major reason why the economy is growing at what the Fed sees as a unsustainable pace. So the Fed will continue hiking the
fed funds rate
until stock prices stop rising so rapidly.
"Greenspan told you yesterday that he's going to tighten till the stock market goes down," said Tom Connor, head of government bond trading at
. "If you're a stock owner, you might as well sell now, since it's going to go down eventually. And if you're a bond owner you say, if stocks are going down, he doesn't have to tighten as much."
Still, bond prices might not have risen as much as they did had today not been expiration day for options on the March bond futures contract.
On expiration day, the market tends to move further in the direction in which it is headed than it would on a regular day. People who are short in-the-money call options on bond futures will buy the futures on expiration day, to hedge the risk that they will be assigned a short futures position. Alternatively, they might buy back their call, which has the same effect on the market since the seller would hedge by buying futures. Prior to expiration day, a call-seller would still have hope that the market might turn down, moving the calls out of the money.
Today, for example, as the
Chicago Board of Trade's
10-year note future rose from 94 18/32 to 95 2/32, the
95 calls doubled in price and the 94 calls more than doubled. And as the
March bond future rose from 94 5/32 to 94 28/32, the
94 calls tripled in price.
At the start of the session, which ended at 2 p.m. EST ahead of the long Presidents' Day weekend, the January Consumer Price Index, the broadest measure of inflation, rose 0.2%, a tenth less than the average forecast of economists polled by
. The core CPI, which excludes food and energy prices, also rose 0.2%, in line with the average forecast. The largely in-line results neither increase nor lessen pressure on the
to raise interest rates to cool the economy, and the market reacted accordingly, which is to say, hardly at all.
The overall CPI rose at an annual rate of 2.7% in January, the same as in December. The core CPI rose at a 1.9% rate, the same as in December.
Also today, the December
showed the first narrowing in the trade deficit in four months. It narrowed from November's record $27.1 billion to $25.55 billion, as exports grew 3.2% while imports grew only 1%.
grew 0.6%, as the 0.2% rise in the CPI cut into the 0.7% gain in average weekly earnings reported by the January
Consumer Sentiment Index
fell to 111.2 from the all-time high of 112 it reached in January.
report showed that the government ran a $62.2 billion surplus in January, compared to $70.5 billion last January. However the budget is on track to rack up an even bigger surplus in fiscal 2000 than fiscal 1999's $124 billion beauty.
Currency and Commodities
The dollar rose against the yen and the euro. It lately was worth 110.91 yen, up from 110.66 yesterday. The euro lately was worth $0.9849, down from $0.9845 yesterday.
Crude oil for March delivery at the
New York Mercantile Exchange
rose to $29.50 a barrel from $29.46 yesterday.
Bridge Commodity Research Bureau Index
fell to 211.90 from 212.77 yesterday.
Gold for April delivery at the
rose to $307.3 an ounce from $303.80 yesterday.