Treasury prices ended lower for the third day in a row as the market failed to sustain its recently reinforced hopes of a half-percent point cut in interest rates next week. Notes and bonds had actually broken a two-day trend by starting on the positive side this morning on the basis of a weak retail sales report. The Bank of Canada's decision to lower interest rates by 25 basis points also helped briefly. But then an article in Market News International suggesting the Federal Reserve was going for a moderate lowering of the federal funds rate (by 25 basis points instead of 50) had the money market reeling.
The benchmark 10-year
Treasury note fell 12/32 to 103 16/32, raising its yield 5 basis points to 5.277%
Treasury bond fell 19/32 to 108 19/32, raising its yield 4 basis points to 5.645%.
Josh Stiles, senior bond strategist at
, preferred to look at the bigger picture. "The market tried to firm up in the morning but has been through a downgrade all afternoon. There are stories circulating around that the rate cut will be 25 basis points, but it is all conjecture. The supply issues, those are for real," he said.
story that Stiles is referring to said that Fed officials were still thinking of a 25 basis point cut rather than a 50 basis point reduction. Recurring proof of a sagging economy and encouraging words from various Fed officials about the central bank being ready to step in and help matters had market observers expecting the more aggressive cut.
The supply of new debt, especially in January, is of course much more tangible. "There is a $10 billion two-year note auction due tomorrow," noted Stiles. In addition, tomorrow will see $5 billion worth of corporate issues entering the market. This clearly affected the trading pattern today.
Money managers usually sell part of their current holdings to make way for new purchases, especially if the new deal promises higher yields, as is the case with corporate issues. Shorter duration notes are also favored during a period of lowering interest rate since these are less vulnerable to the inflationary pressure that may accompany a rate cut.
Due to the heavier sale of longer-term money securities, the difference between the yields on the two-year note and the long bond is now about 0.8%.
Bond analysts are also awaiting the week's more critical piece of economic news, Thursday's
Employment Cost Index
). Stiles thinks the main question is whether the markets and the Fed can withstand a firmer ECI than expected. "The market consensus is
for an increase of 1.1% but we have it as 1.2%. They cannot overlook the ECI, let's put it that way," said Stiles.
As for the tax cuts proposed by the new administration, Stiles believes that Greenspan would like to know more about it before evaluating the impact. "It is going to make a difference whether the tax cuts are loaded at the front end or arranged retroactively. If they are implemented in retroactive terms, then there will be inflationary pressure."
He remains wary of possible overkill by government and federal agencies. "The combination of Fed easing and other significant fiscal stimulus may create problems by the end of the year. It would be too much of an attempt to rejuvenate the economy," Stiles said.
Chicago Board of Trade
, the March
Treasury futures contract fell 19/32 to 102 19/32.
In economic news, the
BTM-UBSW Weekly Chain Store Sales Index
chart ) fell 0.7% in the week ended Jan. 20, after a 0.3% drop in the prior period. The loss is attributed to adverse weather on Saturday, considered the week's strongest shopping day, as well as to people staying home to watch the presidential inauguration on TV. The year-to-year sales average is healthier, with a 3.1% growth, though it is lower than the 4.9% recorded 12 months ago.
Redbook Retail Average
chart ) found January sales running 2.4% ahead of December, narrowly exceeding a target of 2.3%. They were also 3.4% ahead of the previous January. However, this is the month when stores clear inventories, so most of the current sales will probably result in low profit margins. A more accurate reading of consumer spending will be obtained by the second quarter of this year, after the proposed tax cuts, interest rate corrections and rounds of mortgage refinancing have been completed.
Currency and Commodities
The dollar rose against the yen and the euro. It lately was worth 116.94 yen, up from 116.34. The euro was worth $0.9373, down from $0.9393. For more on currencies, see
Crude oil for February delivery at the
New York Mercantile Exchange
fell to $29.57 a barrel from $29.80.
Bridge Commodity Research Bureau Index
fell to 229.33 from 231.88.
Gold for March delivery at the
slipped to $266.70 an ounce from $267.