The Treasury market was so confused today, it decided to shut down early.
Well, not really -- energy problems in Chicago forced an early close today at the
Chicago Board of Trade
at 2 p.m. EDT, just a half-hour after results of the 30-year Treasury auction were released.
But disarray might as well have been the culprit -- as one trader said of today's $10 billion Treasury sale, "A good auction is a bad auction, and a bad auction is a good auction." Uh-huh. Good, bad -- dealers were the guys with the gun -- and they shot down the market after the 1:30 p.m. results announcement. The 30-year Treasury bond fell dramatically, and was lately down 15/32 to trade at 86 16/32, bumping the yield up 5 basis points to 6.26%.
What happened? Well, the "when-issued" 30-year bond (that's the bond-to-be) was yielding roughly 6.125% to 6.13% at 1 p.m., when bids were due for the final sale of the
quarterly refunding. The market generally expects the Treasury to have sold the new bonds pretty close to that yield. But at 1:30 p.m., the Treasury announced that the high yield awarded for the bonds was 6.144%, 1.5 to 2 basis points greater than expected.
Now, if you're an investor looking to hold bonds long-term, that's a good thing -- they came out cheaper than expectations, a nice deal. If you're a dealer, it indicates that the market collectively didn't bid on the auction very aggressively, and it's just another reminder that the outlook is still bearish. Seizing on that, dealers sold, pushing down the price of both the now off-the-run Treasury bond and the bond futures contract.
"The way the market reacts is to how the dealers are doing," said Gib Clark, head government trader at
Zions First Capital Markets
in Jersey City, N.J. "It's a much lower price and higher yield, so people interpret this to mean demand is not there. As you know, we've been going down for a while, and this exacerbated the trend."
(Ironically, yesterday's 10-year auction was the reverse of this bad-good thing. The 10-year when-issued note was trading at around 6.11%, but the government awarded the notes at a high yield of 6.085%. So while dealers are scrambling to cover their shorts because bidding too high (in yield) has left them out of the auction, they're also pleased that there's some demand in the market.)
Another trader at a primary dealer said he's not worried about today's performance after the auction. This bond is the last to be sold prior to Y2K, and its poised to benefit later in the year if fears of Y2K-related computer problems cause investors to sell riskier assets and buy Treasuries. "We'll have no trouble getting customers to buy," he said.
What do all these machinations have to do with how the market feels about tomorrow's release of the July
Producer Price Index
? Well, everything and nothing. Clark said, "It has nothing to do with what
dealers think of the PPI, but if they're uncomfortably long the bond they'd want to reduce their risk before the release of the PPI -- and they're selling into a weak market."
Tomorrow's PPI release, unless it's way out of whack with predictions, should confirm what the market is already thinking -- that the
believes the threat of inflation is great enough to hike the fed funds target rate from its current 5% on Aug. 24. The
consensus estimate is for a 0.3% increase in the overall PPI and a 0.1% increase in the core PPI, which excludes food and energy prices.
Economists are concerned that price increases will show up for goods in the crude and intermediate stages of processing, on the theory that pressures companies encounter now will eventually result in price increases for consumer goods. This would cause the
Consumer Price Index
to rise in the future. (Both of these reports are key inflation indicators, but the market generally considers the CPI the more important of the two. The CPI is released next Tuesday.)
"There's already 25 in the market, but now the market is going to want to see slowing in the economy," said Maryann Hurley, vice president at
Looking at July retail sales, things aren't slowing. Sales rose 0.7%, far ahead of the 0.3% estimate, although excluding autos sales rose 0.3%. But this was blunted by the revision to June's original 0.1% gain to a 0.2% loss.
The market had only a half-hour after the auction to ponder these weighty concerns. The CBOT shut down because
, the electricity provider, was having trouble generating power in the CBOT's area of Chicago, causing a complete shutdown. The suddenly abbreviated session caused a "quick fluster of covering," said Mike McGlone, vice president at
Aubrey G. Lanston
A more-relaxed McGlone, speaking after the forced close, said, "There's not a lot of risk to be taken now -- so we're going home."