Bonds Take Another Beating

Anticipation of new supply, sales by foreign central banks and lingering rate concerns were cited as causes for the selloff.
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Bonds came under heavy selling pressure early today, and while the bloodshed ceased this afternoon, the long bond closed at its highest yield since July 30, 1998.

Anticipation of new supply and sales by foreign central banks were cited as the direct causes for today's selloff. However, sources said the market's degeneration reflects growing belief that the economic strength will push interest rates higher in the next several months. Since last Friday's stronger-than-expected

GDP

report, the yield on the 30-year Treasury bond has risen 20 basis points.

Today, the yield rose 6 basis points to 5.72%. The price of the long bond fell 24/32 to trade at 93 13/32.

The flurry of selling this

morning was related to new issues, sources said.

Fannie Mae

is expected to sell at least $4 billion of five-year notes in the market this week. Underwriters may sell Treasuries before large bond offerings to offset the risk of holding large amounts of debt.

But investors today downplayed that, insisting today's action has more to do with the market's recent bearish attitude. "There's a lot of supply from corporates, and you can look for reasons

for a selloff on a daily basis, but I think it's really just digestion of all the info over the past week," said Ed Munshower, who helps manage $5 billion in fixed income at

Mackay-Shields

.

The perception among investors is that Asian economies, commodities and the cyclical industries are on their way to recovery. Early estimates indicate that

OPEC's

March agreement to cut production by 1.7 million barrels a day is being adhered to, and that boosted crude oil prices again. The June crude oil contract closed up 7 cents at $18.92 on the

New York Mercantile Exchange.

Last week's GDP report exceeded expectations, as did the

Chicago purchasing managers' index

. Yesterday's

NAPM

report was weaker than expected, but the index still exceeded 50, which indicates expansion in the manufacturing sector.

"There's some underlying inflation concerns starting to get built into the market," said Tim Neumann, who helps manage $5 billion in fixed income at

Chase Asset Management

. These concerns explain why investors aren't purchasing bonds on the dips. Trading activity during the last few weeks has been strongest when the bond market is falling, limited when rising.

Between 8 a.m. and noon EDT, when the market dropped like a stone,

GovPX

reported volume up 3% when compared with the average second-quarter Wednesday. But between noon and 3 p.m. EDT, when Treasuries drifted slightly higher, trading appears to have been called early for snow -- volume was down 49%.

"Retail is still not sponsoring the market," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "We're seeing light volume on uptrades and heavy volume on downtrades, and that's a bad sign."

Next week's quarterly refunding was also cited as contributing to today's selloff. The Treasury will announce details of the five- and 10-year note sales tomorrow. Traders frequently sell in advance of a refunding in an effort to get the new securities on the cheap.

But these selling impulses may be offset by the influx of cash that should hit the market when the Treasury pays down maturing securities this quarter. The Treasury estimated it will pay down about $116 billion of old bonds and notes as income tax revenues flow in.

"Over the next few weeks there's going to be a lot of cash coming into the market," said Neumann. "This puts a good technical tone into the market, so to the extent there's supply, I think it's less of a concern."

Further Delays for Corporate Trades I

The launch date for a system that will disseminate corporate bond trade data on a limited and delayed basis has been pushed back

again amid technical glitches, a spokesman for the group that devised it said.

The system, named Corporate Trades I and devised by

GovPX

at the behest of the

Bond Market Association

, was to have been unveiled April 24 to GovPX subscribers and on the group's

Web site, but has appeared in neither place thus far.

"There are some start-up issues we're dealing with, but we've been running it internally and hope to pull the curtain back Monday," GovPX spokesman John Lehner said.

GovPX was founded in 1990 by the

primary dealers of Treasury securities and four interdealer brokers with the aim of increasing price transparency in the government bond market.

The Bond Market Association, which represents the firms that underwrite and trade bonds of all types, designated GovPX to build the system as quickly as possible, after

SEC Chairman Arthur Levitt

and

House Commerce Committee Chairman Thomas Bliley

began calling for measures to bring price transparency to the corporate bond market last fall.

As it has been described by the association and GovPX, Corporate Trades I will at the end of each day report the prices and approximate sizes of most of the day's corporate bond trades by seven interdealer brokers. Interdealer brokers account for about a third of the trading activity in corporate bonds, the association estimates.

--

Elizabeth Roy