Bonds put together a sparkling rally in the long-dated end of the
Treasury yield curve, while the short end of the curve barely went anywhere. The tendency is to say the rally is due to increased expectations of an intermeeting rate cut, but it's really not the case today, despite several pieces of weak economic data.
If anything, the rally is in spite of the predictions for monetary policy. Tomorrow morning
Federal Reserve Chairman
Alan Greenspan is delivering a revised version of the monetary policy report that he delivered to Congress two weeks ago, and in the last 24 hours two different Fed officials have both sounded notes that make it seem like a rate cut is an unlikely thing.
No, today's rally is somewhat technical in nature, and also a function of the long end of the curve catching up to the recent sharp rally in short-dated securities like two-year notes. The 10-year note today rose 19/32 to 100 9/32, yielding 4.964%, while the 30-year bond rose 1 4/32 to 100 10/32, yielding 5.353%. By contrast, the two-year note barely budged, gaining just 1/32 to 100 11/32, yielding 4.439%.
Of course, this doesn't change the prevailing view that the Fed's got a lot more rate cuts in store -- confirmed by the
fed funds futures contract, which measures expectations for cuts in the fed funds rate. Right now, the March fed funds contract is fully pricing in a 50 basis-point cut March 20, but that hasn't changed from this morning, before economic reports such as
durable goods orders and consumer confidence were released. In fact, the contract is already pricing in a 75 basis-point cut, which leads some traders to think that the contract is going to shift in the next few days if the Fed doesn't respond to today's data.
"We've got about 75 basis points of ease built in, and we may have gotten ahead of ourselves here," said Maryann Hurley, vice president in trading at
in Seattle. "The comments we've been getting from Fed officials suggest, and the data we've been getting, while weak, is not data that depicts an economy falling over a cliff."
Today's data certainly displayed a further weakening in the economic state in January. Durable goods orders, excluding transportation, were down 0.3%, and the
Consumer Confidence Index fell to its lowest level since June 1996. The index fell to 106.8 in February from 115.7 in January, the fifth consecutive decline. There was a sharp drop in the current assessment by consumers and an even greater drop in consumer assessment of future expectations.
However, there's a debate as to whether future expectations matter to consumers' current spending patterns, something that Fed Vice Chairman
, in what seems to be an unusual move, addressed in a
speech about financial consolidation, which has little to do with consumer confidence.
"The indexes of consumer sentiment are available on a very timely basis and so can provide an early reading on the direction of household spending," he said in a speech today. "Moreover, while it is a contemporaneous indicator of household spending, sentiment also seems to have some limited predictive ability for
Those are his italics -- his emphasis suggests he and others are likely paying more attention to the significant drop in consumers' assessment of the current economic picture, rather than the steeper drop in future expectations. It also provides some insight into what kind of revisions Greenspan might make tomorrow when he addresses the
House Financial Services Committee
Taken with Dallas Fed President
remarks yesterday, in which he said that unless the need for a rate cut was "obvious and great," they'd prefer to change policy at meetings, it seems
less likely that a cut will ensue this week, barring some kind of disaster. Traders took notice -- earlier in the day, the fed funds contract did rally on the economic data but pulled back on Ferguson's comments.
"There's no reason why
Ferguson had to do this," said Tony Crescenzi, chief bond market strategist at
. "It may have been intentional. We'll learn tomorrow when Greenspan speaks. This is a hint; we'll get an elaboration in Greenspan's speech, with more bite than Ferguson. But it was interesting that it was in this speech at all."
Economic data said the song remains the same. Durable goods orders fell 6%, but excluding transportation orders, they were down 0.3%. That's still not good -- these orders are down three months out of four and on a year-over-year basis are down 5.6%, indicative of sluggish demand for big-ticket items.
The key nondefense capital goods orders, excluding aircraft, finally turned around after three straight months of weakness. It rose 6.5% in January. However, on a year-over-year basis, these orders are flat when considered against January 2001, and show ongoing weakness in manufacturing. The year-over-year rate of growth in this series has fallen for seven consecutive months, from 26.1% in June.
Ongoing softness in this figure is a good measure of the underlying weakness for equipment. It ferrets out aircraft orders, which can throw the report out of whack. It also pulls out military spending -- another volatile component, and one that doesn't necessarily reflect the rest of the economy.
Meanwhile, new homes sales fell to a seasonally adjusted annual rate of 921,000 in January, according to the
, an 11% drop from the 1.034 million rate in December.
One of the other reasons for the rally in long-dated bonds is the extension of durations in the key
bond index. Managers that follow the index have to increase their duration (that is, buy long-dated securities) in order to match this index. The index duration is being extended by 0.18 years tomorrow, greater than the usual 0.10 gain, so that accounts for some of the move in the market.