After a strong advance in the morning, Treasuries rode the wave through the rest of today's session, getting a brief bounce after a well-received two-year Treasury note auction.
The market's been cautious for the last week in anticipation of tomorrow's
Employment Cost Index
report, and analysts believe today's activity was a response to the market's innate negativity.
"I think we're just going to move whatever direction" the ECI says, said Gib Clark, manager of government trading at
Zions First National Bank
in Jersey City, N.J.. "There doesn't seem to be any support to buy the market, and it seems like most of the selling is done in the near-term."
Lately the 30-year Treasury bond was up 21/32 to 97 8/32, near its highs of the day, dropping the yield 5 basis points to 6.33%.
The Treasury sold $15 billion in two-year notes at its regular monthly auction this afternoon at a high yield of 5.395%. Prior to the auction, the note's yield rose as high as 5.99%, and the wide difference (as these things go) means traders bid aggressively for the new issue. The two-year note reacts to expectations of
policy, and many analysts now feel the market has priced in a rate hike to 5.5%.
"It was a very strong two-year auction," Clark said. "It caused a pop in the market. We just got close to 6% and that seemed like a good value."
Analysts weren't worried about the consequences of rallying a day before a potentially negative number for the market. Tomorrow's third-quarter ECI figure, an important wage inflation indicator, may set the tone for Treasury trading leading up to the Fed's Nov. 16 policy meeting. The consensus estimate, according to
, is for a 0.9% increase in the ECI. A larger figure could cause the long bond's yield to head toward 6.5%. A figure that falls short of expectations may not be enough to stave off a rate hike, but it would ease the market's fears of growing inflation.
"I'll look at the price behavior after release of the number," said Richard Schwartz, senior vice president at
New York Life Asset Management
. "If it's at 0.9% and that takes the market
higher, it's a message that we'd gotten oversold, and there was enough bad news already built in. But if it trades off it tells you that investors or market participants are looking for a way out."
Not to be forgotten, third-quarter GDP figures are also slated for release tomorrow. Subject to two subsequent revisions, this figure is expected to show an economic growth rate of 4.7% during the third quarter, compared with 1.6% rate of growth during the second quarter. Inventory buildup and strong consumer spending has likely kept the economy growing steadily, despite a widening of the trade deficit during the quarter.
The market reacted positively to the September
figures released this morning, although bonds had already been rallying. New orders for durable goods fell 1.3% during September, after a 1% rise in August.
But bonds were moving up coming into the U.S. open, supported by rallies in European bond markets. Eurozone money supply grew at a 6.1% annual rate in September, and that got the other bond markets convinced the
European Central Bank
will act to fight inflation and raise interest rates at its Nov. 4 meeting .
This afternoon, the Treasury announced a surplus of $56.4 billion in the month of September. The government closed out fiscal 1999 with a budget surplus of $122 billion, compared with $69 billion for fiscal 1998.
The fed funds futures contract listed on the
Chicago Board of Trade
was lately pricing in a 72.9% probability of a
rate hike, from 5.25% to 5.5%, at its next meeting. Yesterday, the November fed funds contract was pricing in the same chance of a rate hike.