Corporate Supply Rush Cheapens Treasuries

Two key economic reports were roughly in line with expectations.
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Treasury yields are moderately higher this morning due to heavy supply of corporate issues, which compete with Treasuries for investor dollars.

Two key economic reports were released this morning --

retail sales

and the

Consumer Price Index

, both for March -- but both were roughly in line with expectations. The retail sales report, however, sharply revised upward its conclusions about February. Even so, market reaction to the report was muted, with the benchmark 30-year Treasury bond reaching its high for the day -- up 5/32 -- at 8:33 a.m. EDT.

Lately, the long bond was down 22/32 at 96 12/32, lifting its yield 5 basis points to 5.50%. Shorter-maturity note yields were higher by roughly similar amounts.

Retail sales rose 0.2% in March, a tenth more than the average forecast of economists surveyed by

Reuters

, while retail sales excluding autos rose 0.5%, in line with expectations. The March increases, however, were revised up to 1.7% from 0.9% for overall sales, and to 1.3% from 0.6% for ex-auto sales.

As for the CPI, it rose 0.2% overall and 0.1% excluding food and energy prices. Both numbers are a tenth less than the consensus forecast.

Treasury prices held in till about 10 a.m. EDT, around the time that

Freddie Mac

(FRE)

added to an already heavy calendar of corporate new issues slated to price this week a $3 billion deal. As a federal agency, Freddie competes more strongly with Treasuries for investor dollars than standard corporate issues do, said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "The profile of these guys is similar to those who buy Treasuries," he said.

As Treasuries continue to deteriorate, traders are watching the 122 20/32 price level on the long bond futures contract traded on the

Chicago Board of Trade

, corresponding to a yield of about 5.47%, the mid-March low. If support doesn't hold at that level, they're worried about a significantly larger decline.

Rob McCool, a trader at

Bank One Capital Markets

in Chicago, sees higher interest rates a month down the road, but thinks that in the near term support will hold. "If you want to make the fundamental case, you can continue to argue: Where is inflation?" he said. The March CPI, he continued, "was supposed to have some noise in it because of

the recent rise in oil prices, and it didn't. We keep waiting for inflation, but it just doesn't come."

McCool also thinks that the rising stock prices are bound to make bonds look more attactive from an asset-allocation standpoint. "Do I like 5.5%

on the long bond? Of course not, but we've been there before, and as an alternative investment, I think it's where you want to be in the short term."