Long Treasury Yields to Four-Week Lows on Weak Data

Is the long-awaited economic slowdown finally at hand?
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The Treasury market rallied strongly, dropping intermediate- and long-term yields to their lowest levels in nearly a month. The catalyst was a set of surprisingly weak economic reports, assisted by a calendar effect that benefits Treasury prices on the final trading days of February, May, August and November. A sharp advance by the dollar against the yen and a sharp retreat by oil gave investors additional cause to buy Treasuries.

The benchmark 10-year Treasury note rose 23/32 to 101 18/32, dropping its yield 9.5 basis points to 6.281%, the lowest since May 1. Shorter-maturity yields improved by smaller amounts. The two-year note, for example, gained just 3/32 to 99 28/32, trimming its yield 6 basis points to 6.684%.

But the 30-year Treasury bond's yield fell 8.1 basis point to 6.012%, also its lowest since May 1, as its price rose 1 5/32 to 103 9/32. And at the

Chicago Board of Trade

, the September

Treasury futures contract gained 31/32 to 95 20/32.

The principal trigger for the rally was the April

new home sales

report, which detected a large slowdown. The bond market is looking for economic growth to slow to a pace that does not threaten to ignite inflation, so that the

Fed will stop hiking interest rates.

"The home sales number basically reinforced the equity market's expectation that the economy is slowing, and that helped fuel the bond market rally," said Gemma Wright, director of market research at

Barclays Capital

.

Together with the May edition of the

Chicago Purchasing Managers' Index, also released today, and other reports of the last few weeks, the new home sales report "suggests the economic tempo has shifted down a couple of gears," concurred Thomas Carpenter, chief economist at

ASB Capital Management

.

And, Carpenter pointed out, the slowdown apparent in these numbers is a consequence only of the Fed's initial rate hikes, not of its most recent, half-point hike in the

fed funds rate on May 16. "We're only at the beginning stages of softer economic statistics," he said. "They'll accumulate and become more forceful over time." As a result, Carpenter said: "Those who thought the Fed was on a no-return course to

an 8%

fed funds rate from the current rate of 6.5% are being forced to reevaluate that."

Carpenter also noted that the new home sales report and the Chicago PMI are "clean numbers" in contrast to the May

employment report due out on Friday. The spring editions of that report are heavily influenced this year by temporary hiring of Census workers.

The rally triggered by the 10 a.m. EDT release of those reports accelerated due to the breach of a key technical level, Barclays' Wright said. Once the September Treasury futures contract breached 95 16/32, it ran quickly up to 95 24/32 on short-covering, she said.

Finally, long-maturity Treasuries in particular got a lift in the last 15 minutes of the trading day because it was the last day of a month in which the

Treasury Department

issued new long-dated notes and bonds. The many indexes that track the bond market incorporate the new issues at the end of the last day of the month, prompting portfolio managers who mimic the indexes to buy them at that point.

Economic Indicators

New home sales fell 5.8% to 909,000 in April, the slowest pace since October. Economists polled by

Retuers

had forecast a much smaller drop, to 937,000 on average. Still, by historical standards, new home sales are occurring at a very fast pace despite the highest mortgage rates in five years.

In other housing-related news, the weekly

Mortgage Applications Survey

detected pullbacks in both refinancing and new mortgage activity. The Refinancing Index retreated to 294.4 -- the first sub-300 reading since 1997 -- from 328.9, while the Purchase Index fell to 302.8 from 326.3.

The

Chicago Purchasing Managers' Index fell to 53.9 in May, the lowest since September, from 56.5. Economists were forecasting a slight increase. But a less-important manufacturing indicator, the

APICS Business Outlook Index

rose in May, to 52.7 from 51.5.

The

leading economic indicators

index fell 0.1% in April, confounding expectations it would rise by that amount. The largest positive contributor to the index was money supply, while the largest negative contributor was manufacturers' new orders for consumer goods.

Finally, the two weekly retail sales reports were unimpressive. The

BTM Weekly U.S. Retail Chain Store Sales Index was unchanged. And the

Redbook Retail Average found May sales running 0.4% behind April after four weeks.

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 107.81 yen, up from 106.54. The euro was worth $0.9374, up from $0.9298. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for July delivery at the

New York Mercantile Exchange

fell to $28.95 a barrel from $30.35.

The

Bridge Commodity Research Bureau Index

fell to 222.26 from 223.61.

Gold for August delivery at the

Comex

fell to $274.80 an ounce from $275.50.