The benchmark 30-year Treasury bond ended the day unchanged, giving back strong gains made in the morning on fear that another chapter is being drafted of the pre-millennial emerging-markets meltdown, and that it will be set in Argentina.
Essentially, cooler heads prevailed as investors learned more about the situation. An Argentine sovereign default, the prospect that came up for debate yesterday, can't be ruled out, of course. But sometime this morning, investors decided that the bonds, which traded down sharply again today at the open, were over-discounting that possibility.
Investors started buying, and prices recovered to end slightly higher on the day. And that spelled the end of the flight-to-quality rally in Treasuries.
"The market" -- the emerging markets bond market, that is -- "has rebounded really quite strongly, which I associate with the retreat of Treasuries from their best levels," said Dan Peirce, head of emerging markets research at
BancBoston Robertson Stephens
in Boston. "Either somebody's risk-reward ratio flipped, or somebody looked and said, 'Hey, I didn't realize how cheap these things were.'"
"A lot of concerns linger, but default is a long way off," Peirce added, explaining what he sees as the reason for the rebound. "The proximate cause of what we've seen in the last week has been a large seller in the market, and because we had that market activity, it brought renewed focus on the news background," in a country that's in the midst of a presidential election which will give the country a new government for the first time in 10 years. Calling the concerns about the country "overdone," Peirce said: "We see the fiscal numbers, and the financial responsibility, and the general economic state as more resilient than other countries in Latin America."
The benchmark long bond ended the day unchanged at 90 29/32, its yield 5.90%.
Shorter-maturity Treasury notes traded up, however, as investors concluded that maybe the renewed focus on emerging-markets financial pain will stay the
hand when it meets to decide the fate of short-term interest rates on Aug. 24.
"A lot of people are beginning to feel that the chances of a Fed tightening are diminishing,"
Dresdner Kleinwort Benson
senior market economist Kevin Logan said. "With all the trouble in Latin America, maybe they'll hold off."
Market watchers are also saying that this week's rally, which has trimmed roughly 10 basis points from most Treasury yields, has also been driven by optimism about the next round of key economic reports. That round begins tomorrow morning at 8:30 a.m. EDT, with the release of the
Producer Price Index
report, both for June.
The PPI, which measures inflation at the wholesale level, is expected to rise a scant 0.1% overall and 0.1% at its core, which excludes volatile food and energy prices. Retail sales are expected to rise 0.3% overall and 0.4% excluding autos. In both cases, those estimates are for friendlier numbers than the bond market has seen in recent months.
To the extent that traders have been buying Treasuries in anticipation of friendly reports, the market is vulnerable to selling if the reports are stronger than expected, or even if they are as expected, analysts say. Especially since the next round of inflation reports -- the PPI and
Consumer Price Index
for July -- are already striking fear into bondholders' hearts, based on the recent rise in oil prices they will capture (the June reports won't).
"The market will be anticipating
that the next round of inflation reports will be a little nastier,"
Deutsche Asset Management Americas
chief economist Josh Feinman said. Combine that with hesitation to buy ahead of Fed Chairman
testimony on the economy and monetary policy, slated for July 22, and "it could be we're setting up for a classic 'buy the rumor, sell the fact' -- provided that Latin America doesn't blow up."