Awaiting Potentially Decisive Economic Data Tomorrow, Treasuries Hold Steady

Solid demand for today's two-year note auction indicates that many investors see value in current yields.
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The Treasury market ended the day very little changed ahead of the release tomorrow morning of potentially decisive economic data. It traded up a bit in the morning in response to a favorable

durable goods

report, headed lower leading up to the monthly auction of new two-year notes in the early afternoon, and finally recovered after the notes were awarded at a slightly lower-than-expected yield.

Through it all,



Alan Greenspan

, who last week delivered his


testimony on the economy and monetary policy for the



repeated it for the


and took questions from the

Banking Committee

members. But as committee chairman Phil Gramm noted at the hearing's conclusion, the little-changed status of the stock market at that point suggested that nothing Greenspan said during the Q&A altered perceptions about where monetary policy is headed.

The benchmark 30-year Treasury bond ended the day unchanged at 89 17/32, its yield 6.01%. Shorter-maturity notes were likewise unchanged or very little changed.

The Treasury market is pretty evenly divided over whether the Fed will hike interest rates again at its next meeting on Aug. 24, and is counting on several key economic reports to help settle the question.

The first of those reports -- the second-quarter

Employment Cost Index

and the advance estimate of second-quarter


-- comes out tomorrow at 8:30 a.m. EDT. Economists surveyed by


are looking for a 0.8% gain in the ECI and for GDP to grow at a 3.3% pace.

But while bond traders will certainly welcome weaker-than-expected or even consensus reports, market analysts say friendly numbers can't help as much as stronger-than-expected numbers can hurt.

That's due in part,

Lehman Brothers

economist Joseph Abate said, to "a general bias in the market to discount favorable numbers, on the belief that the Fed will also discount past numbers and focus on what the performance of the numbers is going to be in the next six months." In other words, on the belief that when the Fed meets to consider raising interest rates on Aug. 24, it will be more concerned about third- and fourth-quarter than second-quarter ECI and GDP.

But it's also due to the fact that there's a Treasury refunding coming up. The refunding -- the Treasury's quarterly auction of long-dated bonds and notes -- is slated for Aug. 10-12, and there's a seasonal tendency for the market to cheapen in the weeks leading up to it, barring any compelling reason to rally. Dealers simply want the bonds and notes as cheaply as they can get them, so they'll sell as much as they can stand to drive the prices lower.

A more or less in-line ECI will be a "nonevent,"

Banc of America Securities

trader Matt Frymier said. But if it rises more than 0.9%, "the Street will use it as an opportunity to sell the market and bring the refunding at cheaper prices."

As for the advance estimate of second-quarter GDP,

Robert W. Baird

senior bond strategist Jim Kochan says that even a tame headline number could encourage the bears if the consumer-spending portion of the report is very strong. The swollen trade deficit will depress the overall growth rate, but the Fed could conceivably focus on consumer behavior.

This morning's durable goods report offered some hope that the consumer, whose spending increased at a 6.7% rate during the first quarter, is slowing down. Overall, orders for durables rose 0.3% in June, vs. a consensus forecast of 1.0%. And factoring out a 2.7% increase in orders for transportation equipment, durables orders fell 0.4%.

Treasuries pushed a bit higher on the news, the long bond topping out up 2/32 at 8:44 a.m. But then it traded down as much as 9/32 before the 1 p.m. bidding deadline for the new two-year notes.

After the $15 billion of notes were awarded at a yield of 5.544%, slightly below the 5.55% level where they traded at the bidding deadline, prices improved. "It confirms there was good interest in the issue and in Treasuries as a whole," Frymier said.

"There's still a lot of apprehension about the numbers tomorrow," the trader said. "But you have to remember the market is pretty far off its highs. People who a week ago were thinking about buying

the new notes at 5.39% got a chance to buy them at 5.54%." Plus, Frymier says, it's possible the Fed will hike rates again only if all the relevant economic indicators turn out to be stronger than expected. "A lot of people are betting that that's not going to happen."