Cool Reception of New Five-Year Notes Sinks Treasuries

Bearish comments by a big investor also did some damage.
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A chilly reception for the first leg of the Treasury's quarterly refunding torpedoed the bond market today, hoisting the yield on the benchmark 30-year issue to its highest level since last May.

Bearish comments by a big investor --

Stanley Druckenmiller

, manager of

Soros Fund Management's

flagship Quantum Fund -- also weighed on bond prices.

Those forces outweighed anything that a friendlier-than-expected first-quarter

productivity and unit labor costs

report could do for the market. The long Treasury bond ended the day down 19/32 at 91 23/32, lifting its yield 5 basis points to 5.84%, the highest since May 26, 1998. Shorter-maturity note yields likewise rose about 5 basis points on the day.

The refunding -- the Treasury's quarterly auction of new 5-, 10- and, except in the spring, 30-year notes and bonds -- began today with $15 billion worth of new 5-year notes.

The key measure of demand for new Treasuries -- the auction's bid-to-cover ratio, comparing the volume of bids to the volume of bonds for sale -- was the weakest that's been seen since the bear market of the early '80s, indicating widespread fear that prices are headed lower. The bid-to-cover ratio of 1.74, compared to an average of 2.20 over the last 12 five-year note auctions, was the worst since May 1981, according to Lou Crandall, chief economist at

Wrightson Associates

.

The auction was,

J.P. Morgan

managing director Thomas Connor said, "extremely lightly bid for."

As rates keep rising, he added, fear is growing that the

Fed

will confirm the move by adopting an official bias in favor of a higher fed funds rate at its next meeting a week from today. "By day, people are getting more concerned about a bias toward tightening. The thinking is, the lower the market goes, the more inclined they are to give that bias."

Also dogging the market is fear of two key inflation reports -- the

Producer

and

Consumer Price Indices

-- slated for release Thursday and Friday, said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read

"No one wants to be a hero in front of the PPI and CPI," he said. "So I don't think we're going to see any significant move

higher before we get all these numbers under our belts." Most of the focus is on the core CPI, which excludes food and energy prices. It has been running at a 2.1% year-on-year pace, and a 0.2% increase is expected in the April numbers by economists surveyed by

Reuters

. "If that starts to move up, people are going to be spooked by it," Mahoney said.

Today, they were spooked by Druckenmiller, who said at a conference in London that government bonds are in a "bear market and will remain so for a while" as economic growth accelerates, according to

Bloomberg

. "The probability of a global boom is not remote," Druckenmiller said, adding that "the world economy will suck money out of the bond market."

Exceedingly low volume sealed the market's fate today. "Activity was absolutely anemic, which means it didn't take a whole lot of selling to create a pretty sharp downside,"

Stone & McCarthy Research Associates

Treasury market analyst John Canavan said. Tracker

GovPX

saw $54 billion of Treasuries change hands today, 17.5% below average for a second-quarter Tuesday.

As a result, he said, there was almost no reaction to the friendlier-than-expected productivity report. First-quarter productivity rose at a 4.0% rate, besting the 3.0% consensus estimate and holding the increase in unit labor costs down to 0.3%, vs. expectations for a 0.5% gain. Rising productivity enables employers to increase wages and salaries without having to pass the cost on to consumers in the form of higher prices.

"Despite the numbers, people just don't want to buy this market," Canavan said.