Oil, Dollar and Corporate Calendar Gang Up on Fed-Stressed Treasuries

Fedwise, the bond market was in no shape to handle threats from other fronts.
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Treasuries tanked today in reaction to a pack of bearish factors, lifting the benchmark 30-year bond's yield over 6% for the first time in two weeks.

The economic data were only partly to blame, as the day's only report, July

new home sales

, outpaced expectations.

New home sales come relatively late in the economic data cycle. Bond traders were more interested in the latest rise in oil prices, the latest drop in the value of the dollar against the yen and the latest whispers about how heavy the corporate new-issue calendar for September is getting.

All of that assaulted a market that was already second guessing its conclusion that the

Fed

is done hiking interest rates for the year based on Fed Chairman

Alan Greenspan's

remarks in Jackson Hole, Wyo., on Friday.

The long bond lost 1 4/32 to 100 28/32, lifting its yield 8 basis points to 6.06%, the highest since Aug. 16. Shorter-maturity note yields likewise rose anywhere from 7 to 10 basis points

The front-month oil contract traded on the

New York Mercantile Exchange

rose 0.68, or 3.2%, to 21.95 today, its highest close since Oct. 10, 1997. Further stoking concern about rising inflation, the enemy of the bond market, the dollar continued to erode against the yen, dropping from 111.45 to 110.65. A weakening dollar fosters inflation by making imports more expensive.

As for the corporate new-issue calendar, it is more apparition than fact at this stage, but a frightful apparition it is. The whisper number is $60 billion of investment-grade corporate issuance in September, as corporate treasurers rush to tap the market before the year enters its final stretch, when investor appetite for illiquid assets will presumably dry up.

A $15 billion weekly average in September would decimate the trendline for the year to date,

Thomson Global Markets

senior analyst John Atkins said, noting that it has exceeded $10 billion only once.

But Atkins is skeptical of the whisper number at this stage. "As yet there aren't that many names that go with that expectation," he said, meaning that for all that people are throwing the $60 billion figure around, few large deals have been announced.

That's not surprising. The September deals won't start coming this week, with the August

employment report

slated for release on Friday morning. Corporate issuers want a sense of what the market's going to be like before they size and announce their deals. Issuance should pick up after Labor Day, but Atkins said the $60 billion target is vulnerable to rising interest rates in the corporate market, which could price out the most rate-sensitive borrowers. "In spite of corporate issuers' willingness to pay the higher spreads, it's going to be a very one-sided buyers' market," he said.

A heavy corporate calendar can be negative for Treasuries because investors may sell Treasuries in order to clear space in their portfolios for higher-yielding corporate issues.

Meanwhile, bond traders continue obsessing about the Fed. Right or wrong, many allowed themselves to hope that the

announcement that accompanied Tuesday's hike in the fed funds rate to 5.25% from 5% meant that the Fed is unlikely to hike again this year.

Greenspan obliquely challenged that notion in his Friday remarks, when he said that rising asset prices -- he specified home and stock prices -- are an important part of "the macroeconomic environment in which monetary policy must function." The message that the Fed is attuned to more than just goods and services when it sets monetary policy makes traders less certain that last week's rate hike was the year's last.

"People have been second guessing the idea that the Fed's done for the year,"

Merrill Lynch

government bond strategist Jerry Lucas said. He thinks the Fed probably won't hike again, but acknowledges the risk in that stance. "It's going to take a reason for them to tighten, whereas prior to last week's hike, they needed a reason not to." A general strengthening of key economic data could provide the reason, he said.

On today's calendar, July new home sales advanced 0.1% to a 980,000 pace, up from a revised 979,000 in June. Economists surveyed by

Reuters

had expected a slowdown to 910,000. In previously released reports on the sector,

existing home sales

fell 3.9% in July, while

housing starts

rose 5.7%.