A surprising Japanese
report might be the first reason why bonds sold off today, but really, it's just a carbuncle on the butt that is the Treasury market right now. Today wasn't a debacle because prices are down just a handful of ticks, but that's because buyers and sellers alike are hunkering down, waiting for the expected
"We're waiting on confirming information that the Fed is going to raise rates," said Barry Evans, fixed-income strategist at
John Hancock Funds
. "Demand is pretty washed out; the strong GDP out of Japan takes away another layer of the deflation story."
The sense of inevitability over a Fed hike has been replaced with a sense of futility. With a rate increase expected at the end of the month, investors have no reason to purchase bonds now. The federal funds short-term lending target is currently 4.75%.
Of late, the 30-year Treasury bond was down 15/32 to 88 29/32, bouncing off the midday lows. The yield rose 3 basis points to 6.06%, the highest closing yield since April 29, 1998.
It's not surprising, then, that volume is extremely low. While stock markets toy with the idea of longer trading hours, activity in the bond market argues for a noon close, perhaps earlier. Volume today was down 38% when compared to the average second-quarter Thursday, according to tracker
. The busiest chunk of time was overnight, when volume was down just 7% when compared with the average. Between noon and 3 p.m. EDT, volume was down 46%.
What got the market going this morning was the unexpected 1.9% rise in GDP in the January-to-March quarter in Japan, the first positive GDP report in that country since the July-to-September period in 1997. In addition, England and China both cut interest rates, and Asian and European stock markets turned in strong performances. "Today was a strong worldwide growth day," said Ed Munshower, portfolio manager at
But this news hurt demand for U.S. assets, including corporate paper. Over $10 billion in new bonds were sold into the market during the last two days, and those deals have not performed well due to the threat of higher interest rates.
Bank of America
yesterday sold $1.5 billion in five-year notes at a yield spread of 90 basis points over the comparable Treasury -- today it was trading between 92 and 94 basis points, according to investors.
Dealers remain reluctant to take on added credit risk when the trend is the class bully. Corporate issuers, investors say, are exacerbating this problem: Mindful that rates will rise if the Fed hikes short-term lending rates, they're glutting the market with deals before the end of the month.
, for example, is expected to sell between $6 billion and $9 billion in debt before the end of the month.
"What you've got here is a vicious cycle going on," said Mitch Stapley, chief fixed-income officer at
. "Basically, every link in the chain is saying, 'It is not in my interest to be trading right now or to be actively buying.' Issuers are trying to push stuff in, and the buy side says, 'Man, I'm getting hosed on this stuff.'"
In time, investors say Treasury and corporate bond yields could look attractive. Some, such as Carl Ericson, director of taxable fixed income at
, said: "Inflation is going to creep up -- not spring up. If we do back up another 20 basis points, we may be overdiscounting a turn in the economy that we've waiting for. The length and anticipation might be bigger than the actual event."
A clearer picture may emerge tomorrow when the May
Producer Price Index
reports are released. The PPI is expected to rise 0.2%, according to
, but just 0.1% when excluding volatile food and energy prices. Last month the market breathed a sigh of relief when the core PPI only rose 0.1%, hoping that figure would be mirrored in the
Consumer Price Index
. It didn't -- the core CPI rose 0.4% in April, and the inflation worries began.
Retail sales are expected to rise 0.8% in May, while excluding automobiles, sales are called up 0.5%.
Oh, and the day wouldn't be complete without a Fed governor to scare people. Today's was
said in New Jersey that "under the circumstances, we must be concerned that, with the economy operating at such a high level of labor utilization and growth robust, we might be in some jeopardy of setting the stage for an upturn in inflation."
"There aren't a lot of rosy pictures out there, which is probably a sign that it's time to buy," said Munshower.