Updated from 2:05 p.m. EST
Treasuries closed higher Thursday, boosted by a successful $9 billion government debt auction, renewed foreign interest in the 10-year note and corporate debt issuers buying back the market.
Traders looked ahead to Thursday's closely watched retail sales and Producer Price Index reports.
"We're in line with consensus estimates. We don't foresee any surprises... maybe a little weakness in retail sales" says Steve Rodosky, senior vice president with Pacific Investment Management Co.
The PPI is forecast to show a 0.4% increase for the month of December. The closely-watched core figure, minus food and fuel costs, is expected to rise a tame 0.2%, according to analysts surveyed by Briefing.com.
Any surprise jump in the core PPI could mean that high energy costs are seeping into the core inflation rate, and that the
may have to continue to raise interest rates beyond the March meeting.
But if retail sales come in softer-than-expected, it could show that the central bank has tightened rates enough and that the economy is slowing.
Retail sales for December are expected to rise 1%, according to Briefing.com.
The benchmark 10-year note ended the day up 11/32 of a point to yield 4.41%, down from 4.46% late Wednesday. The 30-year bond added 21/23 of a point to yield 4.59%, down from 4.64% in the previous session.
The two-year note edged higher 3/32 to yield 4.37%, while the five-year gained 6/32 to yield 4.34%. Bond prices and yields move in opposite directions.
The Treasury's auction of $9 billion in 10-year inflation-protected notes, or TIPS, saw a bid-to-cover ratio of 1.85. This means that for every $1 sold, there was $1.85 worth of bids.
Most importantly, there was a solid 60.3% indirect bidder participation, which is read as a proxy for foreign investor interest. The October 10-year TIPS offering garnered a 50% share for indirect bidders, and indirect player participation has averaged 44.6% over the last 10 auctions of TIPS.
"Foreign buyers are getting back in, and we saw that in lots of overnight buying activity on the 10-year," says Alan De Rose, a bond trader with CIBC World Market.
Prior to Wednesday, the 10-year saw its biggest two-day slide since November, which pushed the yield to its highest level in three weeks. The high yield may have lured investors back into the market who were waiting for clues as to when the Federal Reserve's interest rate hike campaign will end, De Rose says.
Fed funds futures show a 98% chance that the central bank will increase the overnight lending rate to 4.5% at the Jan. 31 Federal Open Market Committee meeting, up from 88% a week ago. The futures contract shows a 66% chance that the rate will hit 4.75% at the next FOMC meeting in March, up from 46% last week.
But with so much new Treasury and corporate debt flooding the market, this session is being driven by hedging and spreads, according to De Rose.
Corporate bond sales surged to $29.8 billion this week, about $2 billion shy of the record $32 billion sold the week ended Nov. 19, 2004, according to
; Banc of America Securities has forecast that companies will sell a record $80 billion to $90 billion of debt this month.
When a company announces it will issue bonds, it will often hedge its bets by selling off assets, including Treasuries, says Rodosky.
And if demand for its corporate issue seems strong, the company will often buy back Treasuries when the day of issuance comes.
"We're seeing this dynamic happening today as companies take hedges off," Rodosky says. "They've known for a few weeks that they'd sell today and tomorrow, so they sold the market. Now they're buying back."
Wednesday's selloff was sparked by concern that the flood of debt would overwhelm demand, a fear that was exacerbated by a poor five-year note auction. But Rodosky says that hedgers unwinding their positions would keep a floor under the market today, despite all the new notes coming out.
The Treasury announced that it will increase its offering of three- and six-month notes to $37 billion, about $3 billion more than the previous week.
In the next four weeks, the government will sell two-, three- and 10-year notes, as well as an auction of the 30-year bond for the first time in more than four years.
In corporate debt,
sold $5 billion in two-year notes and $4 billion in 10-year notes.
plans to sell $2.1 billion in three parts, and said that the first sale could happen as early as Thursday.
In economic news, the November trade deficit slimmed to $64.2 billion from the downwardly revised record high of $68.1 billion posted in October. Analysts surveyed by Briefing.com had expected the trade gap to hit $66 billion.
Imports fell by 1.1% and exports rose by 1.8% as the deficit with China dipped. However, the trade gap with China remains the largest, at 29% of the total.
Initial jobless claims rebounded by 17,000 to 309,000, but that was still down from the forecast for 320,000.
There was a December budget surplus of $11 billion, which left the 12-month deficit at $320 billion, just a bit higher than the fiscal year 2005 figure of $319 billion.
The manufacturing optimism index jumped 8 points in the fourth quarter -- the first rise since the first quarter of 2005 and the highest level in five quarters.
And the Conference Board released its CEO business confidence index, which rose 6 points in the fourth quarter of 2005 to its highest level since the start of last year.
Separately, Fed Governor Mark Olson spoke late Wednesday night, saying only that inflation remains "under control" as a result of technology and globalization.