Treasuries are slightly higher after traders seized a bounce on a friendlier-than-expected
report as an opportunity to sell. Now the focus is on the monthly auction of two-year notes, for which
yesterday's rally has reduced demand. Bids for the notes are due at 1 p.m. EST, with results to be announced about half an hour later.
After trading up as much as 14/32 two minutes after the 8:30 a.m. EST release of the February durable goods report, the benchmark 30-year Treasury bond was lately up 3/32 at 95 26/32, its yield unchanged at 5.54%. Shorter-maturity notes were mixed.
Orders for durable goods plummeted 5.0% for the month. Economists surveyed by
had forecast a 2.0% drop on average. The headline number was heavily influenced by the transportation sector -- orders for transportation equipment, which are volatile, suffered a 14.3% decline on the heels of January's 13.5% gain. Still, excluding transportation orders, durable goods orders fell 1.7% in February, vs. expectations for a 0.3% increase.
The report cheered the Treasury market by appearing to support the view that the U.S. economy is in no danger of overheating. But skepticism shortly returned to the fore, ushered by comments like those of
High Frequency Economics
chief U.S. economist Ian Shepherdson. "This drop in orders is of no real economic significance," he wrote to clients. "The monthly data are wildly volatile, and the February drop does not reverse the 6.7% total increase in the previous two months."
"The fundamental story doesn't change," concurred Rob McCool, vice president of trading at
First Chicago Capital Markets
. "The economy is doing okay. You're going to get periods of softness and periods when it's too quick, but the net story is that the economy's doing just fine."
Against that backdrop, some traders are looking for further steepening of the Treasury yield curve as the only sensible strategy. Yesterday, the curve attained its steepest slope in six weeks as falling stock prices fueled demand for short-term issues. At the end of the day 57 basis points separated the long bond's yield from the two-year note's.
"I'm more of the mindset that you're supposed to buy the curve than play the long or short side," said Scott Graham, co-head of government bond trading at
. Three factors could steepen the curve, Graham says: more weakness in stocks, the recent rise in commodity prices, and a trade war with Europe.
Higher commodity prices could steepen the curve by threatening to ignite inflation, a key determinant of long-term yields. As for a trade war, if the U.S. and the
fail to resolve their disputes and start slapping tariffs on each other's exports, the U.S. economy, stocks and the dollar will all suffer, prescribing a steeper yield curve, Graham said. "It's only a threat at this point, so I don't think the market has paid enough attention to it," he added.