Evidence of Economic Weakness Drops Treasury Yield to New Low for the Year

Stocks' late selloff further enhanced the appeal of bonds.
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Treasury prices rose thanks to weaker-than-expected economic data and the stock-market selloff. The rally dropped the yields of the benchmark 10-year note and the two-year note to new lows for the year.

The economic data -- orders for big-ticket items and consumer confidence both fell short of economist forecasts -- boosted bond and note prices by increasing the likelihood that the

Fed will lower interest rates in the months ahead in order to keep the economy from slowing too much.

The stock selloff heightened the sense that economic growth may be slowing more than the Fed would like it to. In addition, falling stock prices make bonds more appealing as an alternative investment.

"There's no question the initial run-up

in Treasury note and bond prices was in response to the weaker-than-expected readings on durable goods and consumer confidence,"

Morgan Stanley Dean Witter

fixed-income strategist Kevin Flanagan said.

Later in the session, "it was the decline in stocks -- specifically over-the-counter issues" that stirred up demand for Treasuries, Flanagan said.

The 10-year note rose 9/32 to 101 6/32, dropping its yield 3.9 basis points to 5.587%, the lowest since May 1999.

Shorter-maturity issues fared even better, as they typically do when investors are becoming more optimistic that the Fed will lower the

fed funds rate. The two-year note rose 5/32, dropping its yield 6.1 basis points to 5.799%, the lowest since November 1999.

The 30-year

Treasury bond rose 9/32 to 100 3/32, lowering its yield 1.8 basis points to 5.681%.

At the

Chicago Board of Trade

, the December

Treasury futures contract rose 10/32 to 101 17/32.

The main catalyst for the early rally in Treasuries was the

durable goods orders

(

definition |

chart |

source

) report. Orders for durable goods fell 5.5%, compared to an average forecast among economists polled by

Reuters

for a 1.3% decline. A slowdown in orders for big-ticket items by consumers and business alike is often in indication that economic growth will slow in the months ahead.

A 15.8% drop in orders for transportation equipment was largely responsible for the slowdown; still, the growth rate for durable goods orders slipped to 1.4%, the slowest in nearly two years.

"It is important to note that this report is a volatile one and is known for its wide month-to-month swings,"

Barclays Capital

economist Henry Willmore said in a research note. "However, the data overall suggest a degree of slowdown of momentum within the factory sector."

Meanwhile, the

Consumer Confidence Index

(

definition |

chart |

source

) dipped to 133.5 in November, the lowest since October 1999. The index had been forecast to rise to 135.9.

Falling consumer confidence can lead to slower consumer spending, and consumer spending is the biggest sector of the economy.

The decline was especially meaningful,

Daiwa Securities

chief economist Michael Moran said, because it followed a sharp decline in October. The October drop "appeared as though it may be a seasonal glitch, as the measure had dropped for 11 consecutive Octobers," Moran wrote in a research note. "However, the failure to register a rebound in November, as this measure did in the prior eight Novembers, implies that the recent movement is fundamental."

High energy prices and the poor performance of the stock market are the likeliest reasons why consumer confidence has faltered, Moran said. But people may also sense that the labor market has become a bit less accommodating to job-seekers, as the recent rise in the number of people applying for unemployment insurance benefits each week indicates, he said.

The data releases triggered a reassessment of the chances that the Fed will lower the fed funds rate in the months ahead. At the

Chicago Board of Trade

,

fed funds futures discounted 70% odds that the Fed will lower the rate to 6.25% from 6.5% currently by the end of the first quarter. Yesterday, the futures discounted even odds of such a move.

Economic Indicators

In other economic news, the weekly retail sales reports were mixed. The

BTM Weekly U.S. Retail Chain Store Sales Index

(

definition |

chart ) rose 1.1%, its biggest increase since February, in the week that included the day after Thanksgiving, traditionally among the 10 biggest shopping days of the year. But the

Redbook Retail Average

(

definition |

chart ) found that November sales outpaced October by just 0.2% after the fourth and final retail week, missing the target of 0.3%.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 110.09 yen, down from 110.69. The euro was worth $0.8560, up from $0.8512. For more on currencies, see

TSC's

Currencies column.

Crude oil for January delivery at the

New York Mercantile Exchange

rose to $34.22 a barrel from $34.19.

The

Bridge Commodity Research Bureau Index

fell to 229.11 from 230.65.

Gold for February delivery at the

Comex

fell to $262.60 an ounce from $273.00.