Treasuries Cede Ground Ahead of Greenspan Speech

Also, a heavy corporate calendar is building, thanks to last week's friendly economic data.
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Treasuries retreated further from the multiweek high-price/low-yield levels they reached last week, amid a flood of planned issuance of new investment-grade corporate bonds and a sense that Treasuries cannot rally much further without new information about the economy.

In addition,

Fed Chairman

Alan Greenspan is slated to give a speech tomorrow morning that holds the risk of challenging the conventional wisdom about the likelihood of additional interest-rate hikes.1

The benchmark 10-year Treasury note ended down 3/32 at 103 12/32, lifting its yield 1.5 basis points to 6.030%. Shorter-maturity yields rose even more. The two-year note, for example, fell 2/32 to 100 4/32, lifting its yield 3.4 basis points to 6.305%.

The 30-year Treasury bond slid 5/32 to 105 4/32, raising its yield 1.1 basis points to 5.883%. And at the

Chicago Board of Trade

, the September

Treasury futures contract dropped 2/32 to 97 18/32.

With nothing on the economic calendar, Treasury traders turned their attention to the corporate new-issue calendar. At least $10 billion of investment-grade corporate bonds are expected to be issued this week, compared to a four-week average of $7.7 billion, said John Atkins, market analyst at

IDEAglobal.com

. Bond-market-friendly economic news last week -- the

Purchasing Managers' Index

and the

employment report

in particular -- "opened the door" to the issuance flood, Atkins said.

Heavy issuance of investment-grade corporate bonds can drive Treasuries lower as investors sell them in order to buy new corporate bonds. Particularly during periods when Treasury yields seem range-bound, as they currently do, said Tom Connor, head of government bond trading at

J.P. Morgan

.

"I'd say the economic story seems to be pretty well known," Connor said. "We're sitting at high prices, low yield levels, and I think we're going to continue to trade in a low-yield range for a while." But for yields to drop further, Connor said, "you've got to be looking for the Fed to lower rates next, and nobody's ready to do that."

When interest rates seem range-bound, professional bond investors who buy both Treasuries and corporate bonds will devote more assets to the corporates, which pay higher interest rates. By contrast, when interest rates are moving strongly in one direction or the other, Treasuries experience the greater degree of price change.

Range-bound conditions could persist for months if the Fed leaves interest rates unchanged at its next meeting on Aug. 22, Connor said. Many market participants believe that the Fed will not tamper with rates in the two months before a presidential election.

The upper end of the range, in yield terms, is about 10 basis points higher than current levels, Connor said.

Even without a substantial corporate new-issue calendar, a selloff was natural today because "the market had allowed for a lot of good news," said Kevin Flanagan, an economist at

Morgan Stanley Dean Witter

. "Treasuries were overbought and in our assessment they remain overbought. We're just seeing some adjustment to that position now."

Fed Chairman Greenspan's scheduled appearance tomorrow, before the National Governors Association with a speech on the topic: "Structural Changes in the New Economy," provides additional cause for caution, Flanagan said. "If he thinks the markets are ahead of themselves or complacent

about the prospect for additional interest rate hikes, this is the perfect forum for him to dispel any misconceptions."

As of today,

fed funds futures are discounting 40% odds of a 25-basis-point rate hike in August.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 107.07 yen, down from 107.88. The euro was worth $0.9545, up from $0.9482. For more on currencies, see

TSC's

Currencies column.

Crude oil for August delivery at the

New York Mercantile Exchange

fell to $29.69 a barrel from $30.28.

The

Bridge Commodity Research Bureau Index

fell to 219.31 from 219.33.

Gold for August delivery at the

Comex

rose to $284.90 an ounce from $284.60.