Treasuries slumped today, in action that revealed the extent to which yesterday's rally was driven by goings-on other than the public pronouncements of Fed officials.
The rally failed to extend into a second day, market watchers said, because there's little genuine interest in Treasuries at current yields.
"There was absolutely no sponsorship from retail earlier in the session, and without help from retail, rallies could not be extended," said Roseanne Briggen, Treasury strategist at
. "So it's just the Street playing the range."
Exacerbating the situation, tomorrow's February
report is expected to be strong, and traders aren't willing to risk that it will be even stronger than expected. There were no major economic releases today.
The benchmark 30-year Treasury bond ended the day down 14/32 at 95 16/32, lifting its yield 3 basis points to 5.56%. Shorter-maturity note yields rose anywhere from 1 to 3 basis points.
Today's action effectively reversed the portion of yesterday's rally that wasn't due to market-friendly remarks by Fed Chairman
That portion was driven by two things,
Thomson Global Markets
managing analyst Ken Logan said: short-covering in the 10-year note linked to developments in the repo market, and the expectation that there would be a strong bid for Treasuries today after a couple of big corporate bond deals were priced.
In the last week or so, Logan says, repo traders (they loan money in exchange for securities held as collateral) have begun making a market in the active 10-year note through the end of the year. This is unusual because, typically, interest in borrowing an issue falls off after it is no longer the active issue, and the Treasury plans to issue a new 10-year note on May 15. The bulk of repo activity is either overnight, for a week or until the next new issue.
The development reflects the extraordinarily high level of demand for the 10-year note generally. So does the rate at which owners of the issue can borrow money in repo if they're willing to lend their 10-year securities -- roughly 2.85%, compared with about 4.80% if they're lending general collateral.
"What that's done is created opportunities for arbs and proprietary traders, and it also caught people who were short the issue," Logan said. Today, he said, "that event's over, the shorts got washed out, and there wasn't a lot of new money coming in."
Meanwhile, traders waiting for a big pop in Treasuries after
priced big issues this morning were sorely disappointed, and that triggered selling.
"Because the deals were large and oversubscribed, people figured they were well-placed and that there wouldn't be a lot of selling in the secondary market afterwards," Briggen said. "In anticipation of that people got long, figuring the rally was going to extend beyond Friday's high because people were going to be scrambling to buy back their hedges." When the hedge buyback didn't materialize, she said, "people just started bailing out."
There is a general expectation that Treasury prices will rise after a large corporate issue is sold because underwriters are assumed to be short Treasuries as a hedge against a rise in interest rates that could complicate their efforts to place all the bonds with investors.
It may not have worked today because, while the corporate deals were initially well received,
is expected to bring the largest corporate issue ever in the coming days, and that prospect is casting a shadow over the corporate market. Based on the way the Lucent bonds traded today (well at first, but only fairly well as the day wore on)
Thomson Global Markets
senior analyst John Atkins said, "It seems that people are taking profits quickly to be prepared for deals down the road -- namely AT&T."