The two-year note is leading the Treasury market slowly into the abyss this morning. Analysts say central banks and hedge funds have been sellers of Treasuries today, evidence that there's a growing perception that the
will hike interest rates at the next committee meeting. Today's
revision was ignored, as was other economic data.
For the last two days, bonds were roughly moving against the equity market, but stocks' troubles are providing only a jot of support, now that the market's taking this fear-driven, macro approach.
Lately the 30-year Treasury bond was down just 8/32 to trade at 91 31/32. The yield rose 1 basis point to 5.82%. The two-year note was down 4/32 to 99 23/32, boosting the yield by 4 basis points to 5.40%. Yesterday the Treasury priced $15 billion in two-year notes at 5.315%, which magnifies today's losses even further.
"Obviously, there's a lot of people that believe the Fed is going to tighten in the next couple meetings," said Ken Fan, bond strategist at
Paribas Capital Markets
. "The two-year note has led the market down, while the bond is down 1.5 basis points. So the curve has flattened big time, and that trend is probably going to continue."
The two-year note is most sensitive to changes in monetary policy. The 30-year is impacted less, because its yield reflects the market's inflationary outlook. Apparently, the market is more worried about a Fed rate hike than rising inflation, so the yield spread between the two has narrowed. Since May 18, when the Fed adopted its bias toward tightening rates, the spread in basis points has slimmed to 42 basis points lately from 55 basis points. "That's the game people are playing, and it's hard to fight that trend," said Fan.
This "fear of Fed" outweighs all other concerns, including the first-quarter GDP revision and the weakness in the stock market. First quarter
was revised downward to 4.5% from 4.1%, as the widening trade deficit took a bite out of the earlier estimate. A 4% rate of growth is still considered very strong. The implicit price deflator, the inflationary component of this report, was unchanged at 1.4%.
Initial jobless claims
were unchanged at 300,000, but the four-week moving average rose slightly to 303,500 from 303,000.
The major stock indices spent most of the morning under water, though the
Nasdaq Composite Index
was lately staging a comeback. But bonds have bigger concerns to deal with today.