Bonds Pulverized, With Yields at 1999 Highs

In the Treasury market today, no news was bad news.
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It was a Blue Monday for the bond market, which didn't need any specific news to send prices tumbling, leaving yields at their 1999 highs across the entire yield curve.

The entire year's been a terrible one for bonds, but judging by the last several sessions, the market looks to have saved the worst for last.

Technically motivated selling and a lack of committed buyers doomed the market in the afternoon after a mostly middling morning, one day before the

Federal Reserve

meets for the final time this year. The Fed's not expected to change interest rates tomorrow, but there's a growing perception that the Fed will adopt a bias toward raising rates at the meeting, which indicates their concern about the pace of economic activity and the threat of inflation.

Lately, the 30-year Treasury bond was down 23/32 to 95 28/32, lifting the yield 7 basis points to 6.44%, its highest closing yield this year.

"There's nothing good about what's going on," said John Spinello, government securities strategist at

Merrill Lynch

. "The levels are reasonable but the investors really aren't playing the investor game as far as we can see. They're not going to make a commitment to the Treasury market in last six days of trading" this year.

That lack of buying interest is the main reason why the market wasn't supported when it really began to get hammered in the early afternoon. There's very few investors willing to take on any risk when prices are plummeting and they're focused on preserving the year's gains -- that's like trying to climb up the wrong end of a slide.

Whatever investors are in the market were probably preoccupied with the sale of $3 billion in notes from

Morgan Stanley Dean Witter

. With Treasuries performing poorly, investors have been more interested in higher-yielding corporate paper, Spinello said.

Part of the recent selling is influenced by increased perception that the

Federal Open Market Committee

is going to move to a tightening bias tomorrow, which would indicate that the Fed is likely to raise rates at its Feb. 1-2 meeting.

"If we do get a tightening bias tomorrow, I won't be surprised to see the market trade a little better, in sort of a 'sell the rumor, buy the news' way," said Bill Hornbarger, fixed-income strategist at

A.G. Edwards

.

There's one other wrinkle here: the Fed is reviewing the purpose of the bias, which has confused the markets on several occasions this year. The Fed had appointed a committee to evaluate the bias and what its future role should be, but it's unclear whether the Fed will make a statement discussing its findings.

The 10-year note closed at 6.35%, and the five-year note closed at 6.27%, highs for the year. The two-year note, trading on a "when-issued" basis (in advance of Wednesday's $15 billion two-year auction), was lately yielding 6.22%.

The

Treasury Department

, in announcing the auction details last week, said if the two-year note yielded between 6.125% and 6.249% Wednesday, the auction would be considered a reopening of five-year notes sold in December 1996. At the time, the note was yielding 6.07%. Somewhat ironically, if the market tanks again tomorrow, this issue will be a new one after all -- but sold at a higher yield than that range.