Bonds Erase Gains Heading Into the Weekend

The short end managed to hold up relatively well but the 30-year Treasury came under selling pressure late in the day.

Author:: David A. Gaffen
Publish date:: Mar 26, 1999 4:41 PM EST

Bonds were unable to maintain this morning's gains, and though the short end managed to hold up relatively well, the 30-year Treasury came under selling pressure late in the day.

Poor technicals, corporate supply, a modest equity recovery and selling into strength were blamed for the decline.

"I think this market has no conviction and is chopping sideways, and it has been all week," said Dana Johnson, head of capital markets research at

First Chicago

The 30-year Treasury bond was lately down 4/32 to trade at 95, yielding 5.597%. The two-year note, meanwhile, benefited from fears arising as a result of the conflict in Kosovo, and was lately up 5/32 to yield 4.979%.

The spread in basis points between the two-year note and 30-year bond has widened out to 57 basis points, as compared to 47 basis points on March 18. Some of this is a result of curve-steepening trades, which involves buying two-year notes and selling long bonds as a bet that the spread will widen.

The catalyst for the flight-to-quality bid was Russia's decision to expel

NATO's

representative from Moscow, coupled with reports that the country might attempt to provide humanitarian aid to the Serbs in Yugoslavia. It certainly scared enough people out of European assets: The Euro fell to an all-time low against the dollar since its introduction Jan. 1, and was lately trading at $1.077.

Kim Rupert, senior economist at

Standard & Poor's MMS

, said traders didn't have the intention of going into the weekend shorting the 30-year Treasury bond, but didn't want to maintain long positions either. Without the broad-based interest from retail investors, who were occupied with corporate supply, the market was left to trail off at the end of the day. "There's not enough buying momentum and too much uncertainty over the weekend," Rupert said.

Citigroup

sold a $1.5 billion deal today, one of several issuers.

GovPX

volume was down 16% when compared to the average first-quarter Friday. Between noon and 3 p.m. EST volume fell 24%. Stocks were weak in the morning, but when they recovered later in the day, some of bonds' luster was lost.

Dennis Hynes, chief market strategist at

R. W. Pressprich

, said falling below the 121 7/32 level was considered bearish, and once the market did that in the afternoon, technical sellers joined in to send the market down for the day.

"The primary and secondary trends are bearish," said Hynes. "Buyers don't appear on weakening economic news, and sellers show up on any hint of strength."

Next week's

Federal Open Market Committee

meeting isn't expected to make waves. Several weeks of robust economic data had aroused suspicion that the Fed would move to a tightening bias on monetary policy. But recent reports on the

trade deficit

and

durable goods

, along with dovish statements by several Fed members, limit that possibility.

"There are no signals," said Rupert. "The market is not real well-prepared for such an event. The Fed, for a while, has tried to set the market up at least with an inkling of what's going on."

This would be the first meeting, were the Fed to move to a tightening bias, that it would announce that shift immediately after the Fed meeting. Johnson thinks this attaches more gravity to the Fed's decision, because it gives the Fed a more immediate way to shape monetary policy without actually raising or lowering rates.

"I think they'll use in a more direct way those biases as a means to shape market opinion, and I think they're not in a position to have confidence that they know which way the move is going to be," said Johnson.