The Treasury market got a boost today from better-than-expected inflation data and ended the week respectably higher than last week. But among other things, the prospect of the
Dow Jones Industrial Average
reaching 10,000 in the very near future prevented an even larger rally.
"The data were very favorable and yet the market wasn't able to break any ranges," said Richard Kasmin, U.S. economist at
Warburg Dillon Read
. "We tested the range and quickly snapped back." His conclusion: "There's still quite a bit of negative sentiment out there."
The benchmark 30-year Treasury bond ended the day up 15/32 at 95 29/32, dropping its yield 3 basis points to 5.53%, down from 5.60% last Friday. Shorter-maturity notes outperformed the bond slightly. The two-, five- and 10-year notes shed 5 basis points of yield, widening the yield difference between the two and the bond to 53 basis points from 51.
A better performance might have been expected because the inflation data were very bullish. The February
Producer Price Index
, which measures goods inflation at the wholesale level, fell 0.4%, the biggest decline in the last 12 months. The average forecast of economists surveyed by
was for a 0.1% drop. Excluding volatile food and energy prices, the PPI was unchanged, versus expectations for a 0.1% gain.
Treasuries rallied on the news, but market analysts said they ought to have rallied more. Blocking the way, they said, is fear of a big surge in stocks once Dow 10,000 is breached; residual fear that the downtrend that got broken by the February
last Friday will reassert itself; and anticipation of what is expected to be the largest ever corporate new issue by
. The company has said it plans to issue up to $6 billion, which would not be the largest-ever issue, but expectation is widespread that the deal will be upped in size to as much as $10 billion.
The recent run-up in oil prices is also on strategists' minds, though most react to the production cuts announced today in The Hague with some version of "I'll believe it when I see it." Key oil-producing nations agreed to cut supply by about 2 million barrels a day, or about 6%. But their history of reneging on such agreements has bred skepticism. And even if oil prices do experience a sustained rise,
market strategist Greg Carr said, "We're going to have to see other commodity prices lift before we consider it a threat to the benign inflation picture."
The prospect of Dow 10,000 is hampering Treasuries by threatening to divert money from bonds to stocks, the analysts said.
"People are thinking that stocks are going to surge again and that that's going to take money away from our market," Carr said.
At the same time, strategists wonder whether continued inflation of asset prices could eventually prompt the
to tighten monetary policy.
"The bottom line is that the equity market is doing well, and that usually puts some pressure on the Treasury market," Kasmin said. "What matters is that people think stocks are going to reach that level soon. It's just another reason to be bullish on the equity market and not so bullish on the U.S. bond market. There's no push for a rally in the bond market for sure."
Add to that the fact that until last Friday, Treasuries had been in a sustained bear market since early February, and today's half-hearted action makes sense. Traders are afraid to commit to this rally in case it's just a phase.
"The trend in bonds was severely damaged in the correction, so some chartists believe that this is a short-term bounce off the low that will be retested," Carr said. "There's not much confidence in the market from a chartist's point of view."