Treasury prices finished higher as the money market benefited once again from flight-to-quality buying. Although government securities are considered priced at the top of a near-term cycle, further damage to stocks today brought them more buyers.
After opening strongly, Treasuries had retreated by late morning as the latest economic news suggested that inflation remains in control and consumer confidence has improved. However, with the equity selloff showing no signs of abating, bonds bounced back in the afternoon.
The benchmark 10-year
Treasury note rose 7/32 to 101 26/32, lowering its yield 2.8 basis points to 4.768%.
Treasury bond was unchanged at 101 16/32, yielding 5.274%.
Fixed income investors have also been buying recently on hopes of an aggressive cut in short-term lending rates next week. But John Cassady, bond portfolio manager at
, prefers to concentrate on what is happening in the here and now.
"I never bought into the expectations of a 75 or 100 basis-point cut. The market had gone too far ahead on that issue. A lot of the movement in Treasuries is currently dependent on how the stock market goes," he said.
The yield curve steepened yesterday due to expectations of a greater easing in interest rates. "Investors had bought more on the short-term side of the market. Today the curve has flattened, and the 10-year has done better than the others," Cassady noted.
The rise in the selling price of the 10-year lowers its yield and thus helps "flatten" the right side of the yield curve, which is plotted by the date to maturity.
Cassady also referred to the substantial amount of "convexity buying" that is taking place. Convexity measures the rate at which the "duration" of a bond portfolio changes in response to interest rates. Since duration calculates the rise or fall in bond prices due to interest rate changes, convexity becomes the second-order measure. It is similar to the increasing or decreasing acceleration of a speeding automobile, as opposed to just the change in speed.
Convexity takes on added importance at a time when interest rates are volatile, and bond portfolios with higher convexity move in more pronounced fashion if rates rise or fall.
On the more macroeconomic side, the economic setback in Japan has begun to loom threateningly in the same way as had the California energy crisis a couple of months ago, with possibly strong implications for credit markets. Asked to compare or contrast the two sets of circumstances, Cassady explained.
"The energy crisis in California was one of the reasons the Fed reduced rates. Taken by itself, the state's economy is the 5th or 6th largest in the world, and a huge contributor to the GDP of this country. A crisis there cannot be allowed to go on for so long. There is an obvious supply problem, as the number of power plants has not kept up with the demand. Also, politicians have to figure out how to manage the cap on utility prices. They may like to please their constituents and argue against rising prices, but people would rather pay more for electricity than have it cut off," he says.
The Japanese problem, on the other hand, remains "a kind of an enigma," he says. "Their economy has been in a recession for almost 10 years. They have to find a way out of the protectionist policies that are in place for Japanese companies," Cassady contends.
Although the effects of these crises on the money market have been indirect so far, a sudden deterioration in either case could exaggerate the reactions in credit circles.
Looking forward to the important event of the coming week, the
fed fund futures contract for March is currently pricing in a 60% probability of a 75 basis-point cut in short-term lending rates. A
news survey indicates that 11 out of 25 primary dealers expect that to happen at the
FOMC meeting next week. Also, the April contract is accounting for a quarter-point increase on an intermeeting basis if the Fed moves by only half a point this month.
Chicago Board of Trade
, the March
Treasury futures contract rose 13/32 to 106 27/32. The June contract rose by the same amount to 106 17/32.
In economic news, the
Producer Price Index
) rose by 0.1% in February after January's 1.1% gain. The core PPI, which excludes the more volatile food and energy prices, fell by 0.3% over the same period after a 0.7% gain in January. Economists polled by
hadn't expected any change, so this was a pleasant surprise. It was also the biggest drop since Aug. 1993.
Dave Gaffen wrote a
separate analysis of the PPI results.
) slid by 0.4% in February after a strong 4.8% rise the month before. The number, which comprises the construction of new single-family homes, town houses and apartments, still is relatively high. Analysts think the many mild winter days (though we recall the chilly ones more) contributed to the trend. The number of building permits issued fell by 3.1%.
) fell 0.6% for February, the same rate that it fell in January. Economists had forecast a 0.4% decrease. The capacity utilization rate, which measures how much of factories' producing ability is being used, fell to 79.4% for the month from 80.1% in January.
Consumer Sentiment Index
chart ) rose to 91.8 in March from 90.6 in February. The gauge had declined for three consecutive months, so the latest improvement
is promising, especially as economists had anticipated another fall to 89.5.
Currency and Commodities
The dollar rose against the yen and the euro. It lately was worth 122.89 yen, up from 122.39. The euro was worth $0.8971, down from $0.8982. For more on currencies, see
Crude oil for April delivery at the
New York Mercantile Exchange
rose to $26.70 a barrel from $26.55.
Bridge Commodity Research Bureau Index
slipped to 215.11 from 215.76.
Gold for April delivery at the
fell to $258.10 an ounce from $260.