Lingering Greenspan Effect Keeps Bonds Underwater

A weakened dollar also weighed on the Treasury market.
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Maybe the market's crazy from the heat, but Treasury prices fell for the third straight day, a product of a weakened dollar and continued malaise from

Federal Reserve

Chairman

Alan Greenspan's

harsh

words before

Congress

on Thursday.

The market held firm in the hours preceding the 8:30 a.m. EDT release of the June

existing homes sales

report, but sold off once the market learned of the 10% increase in sales. Of late, the 30-year Treasury bond was down 6/32 to trade at 89 8/32. The yield rose 1 basis point to 6.04%.

"The dollar is weak, and the tone since Greenspan's message at

Humphrey-Hawkins

remains negative," said Astrid Adolfson, financial economist at

MCM Moneywatch

. "Retail, hedge funds, etc., are sidelined, either waiting for Greenspan to say something different or for the data to turn suddenly soft."

Then those investors better hope other reports don't mirror today's existing homes sales release. The seasonally adjusted annual pace of existing homes sales rose to 5.53 million in July, the highest level ever recorded, according to the

National Association of Realtors

. Sales were adjusted to a rate of 5 million in June from 5.07 million originally estimated. Joel Naroff, economist at

Naroff Economic Advisors

, said the recent rise in mortgage rates might actually be the cause, because it impels consumers to "get off the fence" and buy a home before rates increase even further.

The bond market sold on the news, and at one point the 30-year bond was down 18/32. In bearish times like these, second-tier economic releases have a one-sided effect: if they're good, they're ignored; if they're bad, they cause selling. There are more important economic releases later in the week -- the

Employment Cost Index

, a measure of labor costs, is particularly important for the market, since Greenspan's been most worried about wage-induced inflation. Today's report does underscore the incredible spending abilities of consumers, which the Fed used as justification to raise rates on June 30.

"We would have been higher had we not had this report, but it was still only a short-covering bid," Adolfson said. "The dollar is still weak."

Dollar/yen and dollar/euro actually rose today, but weakened during the last week as investors continued to find value in those two struggling currencies. Dollar/yen rose to 116.6 today from 116.52 overnight, still down from 118.18 last Monday, while the euro traded to 1.0657 against the dollar, compared with 1.051 last Monday. Today's 115.67 low matches the dollar's five-month low against the yen.

Treasury

Secretary

Larry Summers

looks like he's already inherited his former boss

Robert Rubin's

penchant for repeating the government's one-sentence approach to currency policies, saying: "As I've said many, many times, a strong dollar is very much in the interest of the United States.''

On the margin, the dollar's strength makes our assets more attractive to foreign investors, including Treasury bonds. Japanese officials have intervened to keep the yen weak several times during the last two months to increase demand in the country's goods -- enabling them to export their way to recovery.

The Treasury market's contending with a lot of supply this week, including

Wal-Mart's

(WMT) - Get Report

$5 billion sale of five- and 10-year notes, and a $1 billion sale from

Sun Microsystems

(SUNW) - Get Report

. The Treasury will sell $15 billion of two-year notes as well. Even after that supply is out of the way, the market gets to look forward to the Treasury's quarterly refunding, which will include the last 30-year bond sale of the year, century, and millennium. (If you're holding onto any

Chaucer

-era bonds, they've matured.)