New Home Sales Take the Shine Off Treasuries

A blockbuster October

new home sales

report has taken the shine off the bond market this morning, but with the November

employment report

due out tomorrow morning, volume is light and prices are little changed.

The benchmark 30-year Treasury bond was lately down 4/32 at 97 19/32, its yield unchanged at 6.31%. The action so far prolongs the downtrend bonds have been in since Nov. 16, when the

Fed

hiked interest rates and

implied that it might have to do so again in the near future.

The long bond rose as much as 3/32 before the 10 a.m. EST release of the new home sales report for October. The pace of new home sales rose a whopping 16.3% to 986,000. That slightly eclipses the November 1998 pace of 985,000 to set a new record.

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Accelerating new home sales are negative for the bond market because new home sales are a leading indicator of consumer spending, the principal driver of economic growth. Bond traders are looking for growth to slow to keep inflation from accelerating.

The report didn't do more damage in part because it is a notoriously volatile data series. In September, for example, the pace fell 8.1% to 848,000. It is also subject to large revisions.

"It's basically unbelievable,"

Dresdner Kleinwort Benson

senior economist Kevin Logan said. "I can't believe that new home sales are rising at a 40% rate in the Midwest." (The pace of Midwest sales rose to 240,000 from 171,000.)

The fact that the pace of

existing home sales

slowed sharply in October also mitigates the impact of today's report, said John Burgess, global head of structured fixed-income at

Deutsche Bank Investment Management

in London. On

Monday, the

National Association of Realtors

reported that the pace of existing home sales dropped 6.6% to 4.79 million in October.

At the same time, Logan said, "it's not as if people want to stake out big positions ahead of the employment report."