The bond market looks like a jigsaw puzzle with a couple of pieces gone.
The market extended yesterday's selloff through today, and even though it found a measure of support at the end of the trading session, the overall picture is still gloomy. On a near-term basis (that's next week and the week after) more selling is expected, as forecasters are looking for more economic data that would support higher yields.
"Tomorrow we're going to see some month-end buying, and with such a dramatic selloff we're probably due for a comeback," said Michelle Laughlin, market strategist at
. "We're going to see selling through most of next week. We're probably going to test that 5.66% level that technically seems to be the target. If we go through that it's possible to move toward 5.80%, but I don't see us moving toward 6%."
The technical support level was viewed as 5.66% in terms of yield, and the cash bond actually did bounce off that figure around 2 p.m. before recovering. Lately the 30-year Treasury bond was down 1 15/32 to 94 24/32, yielding 5.61%. The March futures contract closed at 120 26/32, down 1 2/32.
Selling in this market doesn't appear to be over. Technicals have been weak, as the market has broken through most key support levels during the last two sessions. Volume is light but large, which means a few people believe this could get worse and are selling heavily while the rest of the market hasn't capitulated yet. Interest from money managers and institutions is low because buyers don't have a solid reason to believe yields will recover in the next couple of weeks. Today, tracker
reported volume up 4% today when compared with the average first-quarter Thursday last year.
Bottom-Fishing Possible, but Dangerous
"We could get some bottom-fishing, but so many people who have tried to bottom-fish are not happy with that move," said Barbara Kenworthy, portfolio manager and head of taxable fixed-income at
. "People have to raise the probability that the next Fed move is a tightening and I don't think retail was ready for that."
Obviously not, as several major investors' surveys still show that money managers' average duration is longer than the aggregate index. As longer-dated securities are riskier, it indicates a measure of confidence that is clearly out of step with the market's current trend.
Laughlin expressed the dichotomy between the long-term view retail has taken and the current market action well. "This is overdone -- fundamentally I think this is going to prove to be a buying opportunity over the course of the year, but over the near term the trend will remain negative," she said. "There's no reason to rush in and buy; it's going to retain the negative tone through the month of March."
Tomorrow is the last trading day of the month, so the average duration of aggregate indices (most notably the
index) will be extended to account for the new five-year, 10-year and 30-year securities sold at the quarterly refunding. Usually this generates interest from managers that seek to follow the indices, so some buying is anticipated. The commonly held view is that dealers still haven't unloaded that supply after purchasing it a few weeks ago. When dealers can't sell paper, they mark it down, which makes investors more fearful of buying because they view it as a sign that dealers don't think prices are going to recover soon.
Now then, next week. The fun begins with the
National Association of Purchasing Management
survey on Monday and the
new home sales
figure on Tuesday. Sales of new homes are expected to decline on a seasonally adjusted annual basis to 967,000 in January, compared with 978,000 in December.
Initial jobless claims
data are sure to be another stone in the market's shoe next week. Claims fell to a new record in terms of its four-week moving average -- 292,500, as last week's record of 292,000 was revised upward to 294,500.
And those roads, once again, lead to the February
, to be released March 5. The current forecast is for 218,000 in new nonfarm payrolls, but who knows how far out of whack that forecast is going to be. This number has the market scared -- and more selling into that report should commence once tomorrow's expected spurt of buying recedes. Whichever way the data pan out, the market is bound to be devoted to every economic release (
, time to make your mark!), thanks to
"Quite a few people were arguing that the
interest rates were justified by the structural conditions -- low inflation and a better government balance," said Suzanne Rizzo, economist at
. "Greenspan let people know that the
Federal Open Market Committee
hadn't bought into that."