Treasury prices inched higher today, with gains concentrated in the long bond. Trading was subdued as the market looked ahead to Friday's rash of economic reports, including the revised first-quarter
gross domestic product and the latest consumer-sentiment numbers, which could provide more clues on the state of the economy.
Longer-dated securities, which have been selling off due to greater expectations for economic recovery in the U.S. and the possibility of inflation, were idling after recovering from morning weakness. In late-afternoon trading, the 10-year benchmark note was unchanged at 96 31/32, with a yield, which moves inversely to price, of 5.401%. The 30-year Treasury bond, also known as the long bond, gained 9/32 to 94 23/32, yielding 5.763%. Longer-dated securities took a slight hit earlier in the day amid some profit-taking from last week's trades and an inflow of corporate debt, traders said.
On the short end of the market, which is most affected by expectations of changes in monetary policy, the two-year note gained 1/32 to 99 10/32, lowering the yield to 4.364%.
"The Street itself is looking for signs that the Fed has stopped easing.
The bond market is pretty confident that the Fed is almost done easing but there aren't too many signs the economy is turning around," said Vincent Verterano, head of government trading at
. "There're some inflation worries but until we see the economy turning up, we'll still see buying on dips where prices are lower and yields are going up."
The Fed has so far cut short-term interest rates by 250 basis points in five consecutive strokes this year, with the latest reduction being a 50 basis-point cut to 4% on May 15. The bond futures market is currently expecting a 46% chance of another 50 basis-point reduction by the Fed at its two-day meeting in June.
Other than the GDP figures, Friday's
durable goods orders, a measure of the value of orders received by manufacturers for durables such as motor vehicles and appliances, will offer more clues about the health of the manufacturing sector. Also due for Friday is the
consumer sentiment index for this month, released by the
University of Michigan
, which will be telling about the state of spending and the possibility of higher prices in the U.S.
, Fed governor Laurence Meyer said the Treasury yield curve, which has been getting steeper, indicates expectations for an economic recovery. "In general, the market is trying to forecast what we're doing," Meyer said. "Futures markets predict a small amount of additional (monetary) easing, then a fairly considerable turnaround." But Mayer reportedly would not say to what extent the market was accurate, saying, "They may be right and they may be wrong."
The general rule is that when yield curves, which track the difference between two different securities such as the two-year and the 10-year note, flatten, the bond market is expecting a recession. When the yield curve becomes steeper, the market is forecasting an economic recovery is on the way.
recently examined what the
steeper yield curve implies for the economy and inflation.
Indeed, there still may be room for further easing as the Philadelphia Fed's
latest survey found that economic forecasters believe the U.S. economy is poised for somewhat slower growth over the next two years than was projected just three months ago. The latest survey of 33 forecasters estimated a 35% chance of recession in 2001 and a 20% chance for 2002. The survey also found that growth is expected to average 1.2% in the second quarter, down from the previous forecast of 2.2%.
"The projected increase in the yield spread noted above may reflect the forecasters' concern about higher future inflation. However, our measure of expectations for long-term inflation suggests otherwise. That measure -- given by the forecasters' projection for CPI inflation over the next 10 years -- is unchanged from its level in the last survey. The forecasters continue to anticipate that CPI inflation will average 2.5% over the next 10 years," the Fed's survey noted.