The longer the Treasury, the better it did today. That was due partly to yesterday's
decision by the
to adopt an official bias in favor of a higher fed funds rate, and partly to a couple of large buyers of the long end of the Treasury curve, market watchers said.
The longest Treasury issue, the benchmark 30-year bond, was the star performer, rising 1 5/32 to 92 8/32, its yield shedding 9 basis points to 5.80%. But the 10-year note shed only 6 basis points, the five-year note only 3, and the two-year note was unchanged on the day. As a result, the difference in yield between the long bond and the two-year note, a popular measure of the yield curve, collapsed to 46 basis points from 55 yesterday.
It's normal for the bond to outperform shorter-maturity notes when expectations rise that the Fed will hike short-term rates, which usually serve as a floor under Treasury note yields. When short-term yields are perceived as having nowhere to go but up, rallies in the Treasury market are typically confined to the long end of the yield curve.
That was certainly true today but at the same time, there was huge interest in long Treasuries by at least a couple of buyers. The first was the Fed itself, which conducted a coupon pass for securities maturing from 2022 to 2027. (Actually, the Fed conducted two coupon passes, but the other was for securities maturing this year, which has less of an impact on the coupon market, since those securities are shorter than any benchmark.) The Fed bought $804 million of securities in the coupon pass as the noon hour approached. A coupon pass increases the money supply to meet increased demand, so that the fed funds rate (the cost of money) stays on target.
The second buyer was a well-known international hedge fund, widespread rumor had it. The fund supposedly bought $1 billion of the current long bond.
"Somebody buys 10% of an issue and it's going to trade a bit better,"
co-head of government bond trading Scott Graham observed wryly. The current 30-year Treasury consists of just over $11 billion face value on bonds issued in February. Talk of the buyer started circulating shortly after noon.
Very little else happened today. There were no major economic indicators, and the Treasury's announcement of the size of next week's month two-year note auction was as expected at $15 billion, the usual size.
Meanwhile, a consensus may be forming that the Treasury market is unlikely to stray far from current levels before the June 4 release of the May
"We're not looking at international events anymore. We're honing in on domestic issues and probably trying to establish a trading range right now," Graham said.
"It wouldn't surprise me,"
Deutsche Bank Securities
senior economist Joe LaVorgna said, "if from now till the employment report we trade at these 5.80%, 5.85% levels
on the long bond."
Unless, he said, one of a couple of distinct possibilities materializes: If the dollar, which today made a new high for the year against the Japanese yen, continues to strengthen, which should bring more foreign money into the U.S. bond market. Or if oil prices, which have stabilized in the last two weeks, resume their upward climb, threatening higher inflation.
Because oil inventories have been running at low levels, the summer driving season is nearly upon us, domestic and global growth is outpacing expectations, and compliance with
production cuts has been good, "the risk in oil is higher," LaVorgna said.
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