The bond market weakened again today, returning some yields to their highs for the year, first reached in late June.
There was no specific catalyst, though strong reports on July sales by many carmakers discouraged hope that economic growth is slowing. Rather, the selloff can be blamed on: Poor supply conditions, with the Treasury's quarterly refunding slated for next week and at least a couple of big corporate new issues looking for buyers this week; super performance by a key commodity price index these last two days; and generalized negative sentiment ahead of important economic reports due out Thursday and Friday.
The benchmark 30-year Treasury bond ended the day down 15/32 at 87 22/32, lifting its yield 4 basis points to 6.16%. That close matches the long bond's worst for the year on June 24. Shorter-maturity note yields outperformed. The two-year Treasury note, for example, saw its yield rise to 5.67% from 5.65%. The difference in yield between the two issues widened to 49 basis points from 47 yesterday.
That yield-curve steepening is largely a function of the upcoming Treasury refunding, the government's quarterly auction of long-dated bonds and notes. Next Tuesday, Wednesday and Thursday the Treasury will sell five-, 10- and 30-year notes and bonds. Tomorrow morning, it will hold a press conference to announce how much of each issue it will sell.
Traders expect the Treasury to issue $15 billion of five-year notes, $12 billion of 10-year notes and $10 billion of 30-year bonds, quantities unchanged from the last refunding. And certainly, it's possible the government will pleasantly surprise the market with an announcement that the quantities will be smaller. But in the meantime, long-dated paper is underperforming the two-year note because the coming supply is long dated.
(Larger sizes are unlikely because the mounting federal budget surplus has reduced the government's long-term borrowing needs. And even if the Treasury announces it's going to borrow more than $37 million, "it probably wouldn't have much of an impact in this environment because we know it wouldn't persist,"
chief economist Lou Crandall said.)
The two big corporate new issues seeking buyers this week are a $5 billion two-, five- and 10-year offering by
expected to be priced tomorrow or Thursday, and a $3 billion five-year offering by
expected to be priced tomorrow.
No major economic indicators were released today, and none are slated for release tomorrow. But while traders wait for the second-quarter
productivity and unit labor costs
report on Thursday and the July
on Friday, they can chew on the July car and light truck sales reports, which so far don't appear to support the notion that consumer spending fatigue is setting in.
In commodity land, the
CRB/Bridge Futures Price Index
closed at its highest level since Jan. 13. And while much of the strength in the index is in the grain sector, where prolonged drought conditions in the Midwest are lifting prices, bond traders don't like the look of that chart.
It doesn't mean that future inflation reports (the
Consumer Price Indices
) won't look as pretty as they have in the past, but it certainly betters the odds of that happening, and that's enough to further depress a bond market that was in a bad mood to begin with,
Morgan Stanley Dean Witter
chief money-market economist Bill Sullivan said. "It all stems from a very negative sentiment regarding the outlook for interest rates, inflation and monetary policy," he said. "The overriding psychology among bond investors is a negative one, and it prompts investors to gravitate to negative news and ignore any positive influences." It won't let up, Sullivan says, without incontrovertible evidence of moderating economic growth, slack returning to the labor market and pressure on commodity prices.
Negative sentiment is so widespread that
Warburg Dillon Read
Treasury market strategist Mark Mahoney thinks doubtful yields will rise much further, even in the event that the economic data due out at the end of the week are unfriendly. At the same time, he said, any rally on friendlier-than-expected numbers "is going to be capped by the refunding. We aren't going to get a rally on weak numbers until after the refunding."