Friendly sounding remarks from a couple of
heads dovetailed nicely with more non-inflationary economic data to boost the bond market in another light trading session. Lately the 30-year Treasury bond was up 27/32 to trade at 95 29/32, as the yield slimmed to 5.53%. But tracker
reported volume down 24% when compared with the average first-quarter Tuesday, indicating that most of today's activity occurred between brokers and dealers, rather than retail investors.
"I'm surprised," said Richard Schwartz, portfolio manager at
New York Life Asset Management
, who expected volume to be lower. Schwartz, who's lately been doing about one-third of the usual amount of trading, said, "We have no massive portfolio allocation trades to make. I think that's largely the case with a lot of investors; investors see such a volatile couple months, and they're waiting to watch it settle in."
Strategists are expecting more thin activity for the remainder of the week after the binge-and-purge action witnessed in the weeks leading to last Friday's
. This week's economic data is largely second tier (with the exception of Friday's
Producer Price Index
) and the market is taking this opportunity to reestablish a range.
"We're locking into a trading range in the long bond, from 5.40% to 5.50%, so at 5.54% we're getting closer to the top of the range," said Michael Krauss, chief technical strategist at Chase Securities. "The downside is 5.75% to 5.85%. I think we could spend the next month in that range." (After Krauss spoke to
, the bond yield declined).
Volume isn't expected to pick up, as investors continue to hold Treasury bonds and fatten up on big corporate deals, including coming deals from
. Major investor surveys indicate that retail investors are still maintaining a portfolio with a slightly longer duration than the average benchmark. As a technical indicator, this is disturbing, because if a selloff materializes, investors, already long, won't want to step in to support the market.
"There continues to be a sense amongst portfolio managers that are still long the benchmarks that the worst is over," Krauss said. "It suggests that medium term, it's more likely we could come out to the bear side."
Market Enjoys Fed Remarks
After a thin morning punctuated by a productivity revision and a Fed coupon pass, the market was boosted by some dovish sounding remarks from Federal Reserve Chairman
and Dallas Fed President
Until the afternoon, the best-performing security had been the 10-year note, once again the product of mortgage investors buying securities in an attempt to extend the duration of their portfolio. When the market rallies, the risk of mortgage prepayment increases, and to hedge against that risk, investors purchase Treasury securities -- most frequently in the five- and 10-year maturities. The 10-year rose 21/32 to yield 5.17% in trading today.
The chairman's remarks, in particular, seemed an affirmation of Friday's employment report. "Despite the tautness in labor markets, there have been no obvious signs of emerging inflation pressures," he said in his prepared
statement at the Fed's conference on
Business Access to Capital and Credit
The chairman only devoted one paragraph to the overall economy in this speech, but the words were differed slightly from Monday's
remarks before the
Mortgage Bankers Association
. In that speech Greenspan discussed the housing market at length, but the content was factual, and could have been lifted from recent housing data. With regard to inflation, he stated that it has been "well behaved."
The statements helped along a market that had managed meager gains on the revised
productivity and unit labor costs
figure. Revisions generally don't move the market much, because they're viewed as out of date, but the change to this fourth-quarter figure raised an eyebrow or two. Productivity was revised upward to 4.6% from 3.7%, while unit labor costs came in at a decrease of 1.1%, compared with the original 0.2% decrease.
"I think what we're discovering is that the Fed can certainly tolerate a 4.4% unemployment rate as long as there are no wage pressures looming ahead, and that's what these productivity figures suggest," said Kevin Flanagan, money market economist at
Morgan Stanley Dean Witter
McTeer, queried by reporters at the same conference Greenspan was attending, said he didn't see inflation picking up yet, citing commodity and oil prices as evidence. McTeer, considered to be mildly hawkish, is a voting member of the
Federal Open Market Committee
The yield on the July fed funds futures contract fell to 4.86% today from 4.89%, which means futures traders decreased their expectations for a Fed tightening by this summer. The April contract remained unchanged at 4.78%.