Bring It On, Alan

Treasuries lost a bit more ground ahead of tomorrow's twice-yearly Humphrey-Hawkins testimony by Fed Chairman Greenspan.
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Bond prices ended the final session before

Humphrey-Hawkins

somewhat lower on the day. A larger-than-expected drop in

housing starts

and weakness in stocks couldn't entirely undo the early-morning damage done by a

Fed

story in the

Washington Post

.

The benchmark 30-year Treasury ended the day down 7/32 at 90 29/32, lifting its yield a basis point to 5.90%. Shorter-maturity note yields also tacked on a basis point or 2.

The weakness in the market today can certainly be explained, but far more important than any of the factors that explain it was anticipation -- make that paralyzing anticipation -- of Humphrey-Hawkins. Humphrey-Hawkins, Being Fed Chairman

Alan Greenspan's

Semiannual Congressional Testimony on The Economy and Monetary Policy, slated for 11 a.m. EDT tomorrow.

Over the last six years,

Miller Tabak Hirsch

chief bond market strategist Tony Crescenzi pointed out in a research note this morning, the Humphrey-Hawkins address has moved the price of the long bond futures contract traded on the

Chicago Board of Trade

a full point, on average. And in the four sessions after the address, Crescenzi says, the market has typically moved twice as far as it did on the day of the address, in the same direction.

Michael Pianin, vice president at

ING Futures and Options

, summed up traders' unwillingness to do much in these days leading up to Humphrey-Hawkins in the title of his daily missive on futures market technicals. "Bring it on, Alan," he challenged.

The potential for this Humphrey-Hawkins testimony to move the bond market is at least as great as ever. There's a great deal of confusion in the market about what the Fed meant when it announced on June 30 that it had reverted from an official bias in favor of raising interest rates to a neutral bias. Historically, the bias applied only to the period leading up to -- but not including -- the next meeting. But historically the Fed didn't announce its bias. However, since it began doing so this year, the central bank hasn't made clear whether the bias indicates anything about the likely outcomes of subsequent meetings. Bond market mavens hope and expect that Greenspan will shed light on the question in his testimony.

In other words, people want to know: Is the neutral bias an indication that the Fed isn't likely to raise rates again at its next meeting on Aug. 24 (many certainly interpreted it that way, rallying bonds strongly on the June 30 announcement), or is it no such thing? And if it's no such thing, how likely is the Fed to raise rates again at the Aug. 24 meeting, in light of the fact that the hot April

Consumer Price Index

released six weeks before the first rate hike has been followed by two consecutive unchanged readings.

Crescenzi thinks that regardless of how the Fed chairman answers those questions, he'll be careful to use sobering words. "Expect Greenspan to avoid language that would spark a rally in the markets so as to avoid further cannibalization of the Fed's June 30 hike," he wrote. "After all, the Fed's objective is to slow growth, not help it."

On the question of what the neutral bias may mean, the

Washington Post's

veteran Fed reporter,

John Berry

, weighed in this morning with a story reporting that the Fed's monetary policy committee, the

Federal Open Market Committee

, is divided on the question. Some members (

Kansas City Fed

President

Thomas Hoenig

, for example) think the bias applies only to the intermeeting period, while others (like

Richmond Fed

President

Alfred Broaddus

and

Dallas Fed

President

Robert McTeer

) think the new practice of announcing it changes its character.

The story was the reason the market traded down sharply in the early hours,

Paribas Capital Markets

senior bond strategist Richard Gilhooly said. The long bond traded off as much as 1 4/32 at 7:12 a.m. EDT. "It did lead to some concern that the rally after the neutral bias was a misinterpretation," he said.

Also working against Treasuries today: further weakness in the dollar against both the euro and the yen, which discourages foreign investors from buying dollar-denominated Treasuries.

The drop in housing starts relieved some of the pressure on the market. Starts fell 5.6%, to a seasonally adjusted annual rate of 1.571 million in June, from 1.665 million in May. They peaked in January at a pace of 1.820 million, and bond investors are hopeful that this year's rise in long-term interest rates will continue to rein in consumer spending, slowing the economy to a pace the Fed is more comfortable with.

And while stocks recovered in the final hour of trading, their weakness for much of the session was another source of strength for bonds, Gilhooly said. "Stocks have come off in reaction to what major companies like

Microsoft

(MSFT) - Get Report

have been saying about the fourth quarter," he said. "If

Bill Gates

is saying that PC demand is slowing, then maybe the long-anticipated economic slowdown is upon us. He's better positioned to make that judgment than a lot of other people."