Publish date:

Long Treasury Yield Gets Back Under 6% in Supply-Driven Rally

But the Fed outlook is unchanged based on the Consumer Price Index for February.

Long-term Treasury prices continued to march higher following this morning's release of data showing that consumer prices rose only about as much as expected last month. The price action dropped the yield of the 30-year Treasury bond below 6%, and took the yields of both the bond and the benchmark 10-year Treasury note to their lowest levels of the year.

Crucially, though, short-maturity Treasuries, which most closely reflect expectations about what the

Fed

is likely to do with the short-term interest rate it controls, lost ground, pushing their yields up ahead of Tuesday's Fed meeting. The meeting of the

Federal Open Market Committee

is widely expected to produce a hike in the

fed funds rate

, from 5.75% to 6%. Since June, the FOMC has hiked the fed funds rate a full percentage point in four 25-basis-point moves.

Some observers interpreted the price action as purely an extension of the long-maturity rally of the last two months, which has been driven by supply-and-demand dynamics: The Treasury Department is cutting the supply of long-maturity debt, while there has been no corresponding decline in demand for long-maturity bonds from investors who need them.

"It has become a purely supply-driven market in which the day-to-day price action may be somewhat random," said Anthony Karydakis, senior financial economist at

Banc One Capital Markets

.

The Treasury market "got very excited by the buyback yesterday, and that theme seems to be consistently underlying people's actions," Karydakis said. It may be acting like a bull market lately and perhaps it is one. But at the same time, in the absence of certainty about how much the Treasury Department intends to reduce the outstanding supply of long-term bonds and at what rate, "I don't think it's feasible to predict what a supply-driven market is going to do," he said.

In

yesterday's buyback, the Treasury Department took $1 billion of 30-year bonds issued between 1988 and 1991 out of circulation by asking dealers to state the prices at which they would sell the securities. The department is taking bonds out of circulation because it can; the federal government is running a surplus, and this is what it is doing with the spare cash.

The rally isn't explained by the inflation data, Karydakis said, because the data was "pretty much as advertised." The

Consumer Price Index

rose 0.5% in February, narrowly exceeding the consensus forecast of economists polled by

Reuters

for a 0.4% gain. The year-on-year growth pace for the CPI quickened from 2.7% to 3.2%, the fastest since December 1996.

It was the largest monthly gain since April 1999, but it was heavily inflated by a 4.6% increase in energy prices. The core CPI, which strips out volatile food and energy prices, rose just 0.2%, in line with expectations. The year-on-year pace of the core CPI accelerated from 1.9% to 2.1%, remaining in the range it has inhabited for the last year.

The benchmark 10-year Treasury note rose 13/32 to 102 8/32, clipping its yield 5.5 basis points to 6.192%, a level it hasn't seen since Dec. 13. The 30-year bond gained 18/32 at 103 15/32, dropping its yield 4 basis points to 5.999%, its best level since Sept. 24. But the two-year note fell 2/32 to 100, lifting its yield 3.4 basis points to 6.497%.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 14/32 to 96 7/32.

TheStreet Recommends

Gross Sees Volcano of Debt

In his monthly essay published today on his firm's

Web site, bond guru

Bill Gross

, a portfolio manager for

Pimco

, lays out a frightening case for why he's bullish on the Treasury market.

The real economy may remain in good shape, with the combination of globalization, technology, demographics and governmental and central bank discipline continuing to argue for global growth and mild inflation, Gross says. But the real economy isn't bond investors' only consideration. The other one is finance, and the financial picture is dominated by "the burgeoning level and excessive use of debt in both the U.S. and Japan," Gross writes.

Total U.S. debt -- including everything from margin borrowing to corporate borrowing -- is at a postwar high as a percentage of GDP, suggesting, Gross says, that "the U.S. is not necessarily the island paradise reflected in the Nasdaq or even the S&P. There's a volcano of debt on this island as well as that of Japan that threatens to erupt at some future date."

"The Pimco supertanker must at the least make preparations to leave this port of deteriorating corporate debt, which in normal English, means upgrading the quality of our portfolios," Gross says. In really normal English, that means buying Treasuries and avoiding riskier asset classes.

Economic Indicators

Also today, inflation-adjusted earnings were found to have dropped in February.

Real earnings

fell 0.5%, as the 0.5% increase in the CPI cut into average weekly earnings that were unchanged in February.

Also, the

Consumer Sentiment Index

retreated in March for the second month in a row, the preliminary report showed. The index dropped to 107.7 from 11.3 in February.

Currency and Commodities

The dollar gained against the yen and lost ground against the euro. It lately was worth 106.73 yen, up from 105.54 yesterday. The euro was worth $0.9715, up from $0.9713. For more on currencies, please take a look at

TSC's

Currency Watch column.

Crude oil for April delivery at the

New York Mercantile Exchange

fell to $30.85 a barrel from $31.09.

The

Bridge Commodity Research Bureau Index

fell to 216.86 from 217.13.

Gold for April delivery at the

Comex

fell to $285.20 an ounce from $287.00.