Updated from 2:18 p.m. EST
With a $13 billion auction of 10-year notes out of the way, Treasuries fell Wednesday on worries about the next session's 30-year bond sale, as well as readings on weekly jobless claims and wholesale inventories.
Yields on the short end of the curve briefly bounced higher on reports that Alan Greenspan believes the economy is going strong, but several rate watchers said that his comments had little real effect on the market.
Most recently, the benchmark 10-year note was down 6/32 of a point to yield 4.59%, while the 30-year bond dropped 11/32 to yield 4.68%. Bond prices and yields move in opposite directions.
The five-year fell 4/32 to yield 4.55% and the two-year edged lower 2/32 to yield 4.63%. The yield jumped by 4 basis points to 4.65% soon after
reported that former
chairman Greenspan made some very bullish comments on the economy Tuesday evening at a meeting with Lehman Brothers.
But the yield edged lower soon after. "To be honest, I don't think his remarks had any major effect," says ABN Amro's chief Treasuries trader Rick Klingman.
"Because the event happened, people will tend to attribute the slump it to Greenspan, but the market had a bearish bias as it was and we're the middle of a big refunding week," says Jim Glassman, chief economist at J.P. Morgan.
Greenspan allegedly said at a meeting at Lehman Brothers that he's bearish on the economy and that markets are underestimating the amount of tightening the Fed still has to do, comments that "are not particularly new in and of themselves," Glassman adds.
But the fed funds futures contract is now pricing in 92% odds that the overnight lending rate will go to 4.75% in March, while the futures contracts show a 56% chance that the rate will hit 5.0% in May and an 82% chance that it will reach 5.0% by June. About a week ago, odds were at 24% that the fed funds rate would hit 5.0% by June.
David Ader, U.S. government bond strategist at RBS Greenwich Capital, believes the threat of more interest rate hikes has been priced into the two-year note. Nevertheless, he is "not optimistic for the front end going into
Ben Bernanke's testimony next week and expects little relief -- if anything, veiled affirmation that more firming may be needed."
Even though the Treasury's second refunding auction of the week was considered successful by participants and traders, David Ader, U.S. government bond strategist at RBS Greenwich Capital, says, "The post-auction price action is neutral to negative, inhibited by prospects for tomorrow's 30s."
Wednesday's 10-year auction saw a bid-to-cover ratio of 2.32, meaning that for every $1 sold there were $2.32 worth of bids.
The issue was sold at a 4.54% yield, a basis point below estimates for 4.55%; and indirect bidders, which include foreign central banks and pension funds, bought 40.8% of the securities.
The last $13 billion auction saw a 4.578% yield, a bid-to-cover of 2.24 and 55.6% indirect bidder participation.
Thursday's 30-year bond sale, the first since August 2001, will finish off the Treasury's $48 billion quarterly refunding.
"What we need to see tomorrow is that indirect bids are very high come in between 50% and 60% to prove expectations that the bond has truly been in excess demand," says Richard Gilhooly, interest rate strategist at BNP Paribas.
Proof that of outsize demand for longer-dated maturities would also help explain and justify ultra-low rates on the long end of the curve, which Alan Greenspan has called a "conundrum."
The market is scrutinizing all of the auctions for demand from indirect bidders, which include both foreign buyers and pension funds.
Foreigners have played a key role in Treasury auctions because their share of the market has increased to 52% as of November 2005, up from less than 35% in 2001. Their buying of Treasuries has kept long-term rates low in the U.S., fueling sectors including housing and consumer spending.
"The 10-year and the bond are more domestically dominated, and their auctions are representative of where money managers and pension funds think real rates will go," says Gilhooly. "The next two auctions will also be an interesting barometer of how much buying pension funds really need to do."
Housing softness kept a floor under bonds in morning trading, with the Mortgage Bankers Association reporting the second consecutive drop in its index of mortgage applications, which fell 1.2% over the past week.
The weekly report's purchase index was also down 2.4%, while the average 30-year mortgage rose to 6.25% from 6.20%.
A housing slowdown seems a foregone conclusion, and economists are debating just how soft the market will become and whether it will mean a severe cutback in consumer spending.
Tuesday, luxury-home builder
said that first-quarter orders fell 29%, the first drop in three years, and cut its sales forecast for the year.
Although Toll Brothers represents activity at the high end of the housing market, the announcement ramped up fears that the market could be harder hit than previously expected.
But David Seiders, chief economist for the National Association of Home Builders, tried to allay fears of a housing market bust.
"We can't hold at the pace we had last year,'' he said before the Toll announcement. "It's not going to be the end of the world -- it's going to be a simmering down to a very healthy pace."