The bond market turned lower today amid this morning's stronger-than-expected
existing-home sales figures, indicating that consumers have enough confidence to keep spending on big-ticket items like housing. Recent gains in the stock market also triggered some selling in Treasuries, particularly in the short end of the market.
Indeed, new-home sales rose 4.2% in March while existing-home sales rose 4.8%, both stronger than expected, suggesting the U.S. economy is not approaching a recession. According to commentators on
, "The strength suggests that the
Fed was correct to highlight capital spending as the main risk to the economy rather than consumer spending. In essence, the housing data show quite clearly that the outlook for the Old Economy remains fairly solid even if the outlook for the New Economy remains murky."
Treasury market analyst John Canavan at
Stone & McCarthy Research Associates
believes that today's selloff in the shorter maturities was in response to the housing data, which raised the question of "how aggressively the Federal Reserve will act going forward."
Lately, the two-year note was off 5/32, to 100 1/32, moving the yield up to 4.232%, as yields move inversely to prices. The 10-year note was lower by 13/32, to 97 30/32, yielding 5.269%, while the
30-year Treasury bond, otherwise known as the long bond, dipped 11/32 to 94 6/32, yielding 5.786%.
Short maturities, which react dramatically to expected monetary changes, have been outperforming the longer maturities steadily in the past few weeks, leading to something called "steepening," namely when the difference in the yield of the two-year note and the 30-year bond increases. The Federal Reserve's surprise rate cut last week bolstered the steepening trend as investors rallied on the shorter end in anticipation of further rate cuts by the Fed.
yield curve flattened slightly today as investors reacted to the better-than-expected housing starts figures. Canavan said that the bond market largely discounted the
durable goods orders, which
showed that the rate of business spending remains poor.
Meanwhile, Richmond Fed President Alfred Broaddus said last night that the excess capacity, particularly in high-tech manufacturing companies, could be a "big, downside risk in the economy," but that low inflation gives the central bank more flexibility to take action on interest rates. The nonvoting member of the central bank's policy-making
Federal Open Market Committee also said the Fed will continue to monitor developments in the economy closely.
With mixed signals at hand, some more economic data out this week should give the markets clearer economic direction. Canavan pointed out that the bond market will watch tomorrow's
employment cost index as well as Friday's first-quarter
Gross Domestic Product numbers -- a crucial indicator of the actual pace at which the economy is growing or shrinking. Fed Chairman
Alan Greenspan's speech on Friday to the
Bond Market Association
will also offer more clarity about the state of the economy, Canavan said.