Treasuries Eat Corporates' Dust

However, volume was subdued in light trading.
Publish date:

Treasury bonds stumbled through a mostly uncomfortable session, most notable for the pricing of two more billion-plus corporate bond offerings. There wasn't another catalyst to push bonds lower exactly, just some mildly depressing data and the lingering sting of yesterday's remarks from

Fed Governor Laurence Meyer


This week's been the antithesis of last week's staccato rally that lowered the long bond's yield by 14 basis points. Today it trudged 2 basis points higher to 5.53%. Lately the 30-year Treasury bond was lower by 7/32 to price at 96 2/32. Volume was dry --


reported it down 30% when compared to the average second-quarter Thursday.

"What's happening largely is the supply coming in the corporate market is weighing on the bond market, but basically it's a light volume day with little activity," said Richard Schwartz, who manages $23 billion of fixed income at

New York Life Asset Management


Maybe today's activity is indicative of the long bond hitting the midpoint of the trading range, which appears to be a bit lower than the 5.5% to 5.7% range established during March. Traders were reportedly mildly disturbed by Meyer's comments yesterday, even though they were in line with his supposedly hawkish leanings.

The April

Philadelphia Fed

survey turned in its best performance in almost three years, but that's not necessarily a harbinger of rising inflation. "It really could go either way, but at the end of the day, until one thing or another moves us, we're going to stay at 5.5%," said Jim Chassen, portfolio manager of the $80 million


Hibernia U.S. Government Income fund.

So today, investors didn't really ponder such lofty concepts. The oil company



priced $4 billion in five-, 10- and 30-year securities, and the associated hedging activity knocked Treasury bonds down as a result. However, after the issue priced, the expected reversal of that activity, which involves buying back Treasury bonds, had only a mild effect on the market.

"The commodity sensitive sector is a good place to be, especially going into the second quarter and third quarter, because they've lagged in tightening with the rest of the corporate markets," said Christopher Harms, who co-manages $5 billion in fixed income at


, and bought the bonds today. Also in the market today was

Korea Development Bank

, which sold $1 billion in bonds.


Philadelphia Fed

index rose to 26.4 in April from 10.4 in March. Considered one of the stronger forward-looking indicators, it's at its highest level since July 1996.

"Part of the reason for some of the backup that's been continuing for the last couple days is the economic news is conflicting with the inflation story," Chassen said. "The inflation story is there's nothing there, but some economic news says something different."

It will be interesting to see if Fed Chairman

Alan Greenspan

echoes any of Meyer's comments in his speech tomorrow in Dallas. Meyer, though defined as a hawk, is considered one of the Fed's more forward-looking thinkers -- he's signaled changes in monetary policy in speeches during the last two years. This makes his comments yesterday at the

World Economic Forum

curious, also because they contradict, to some extent, dovish, "New Era"-sounding speeches by other Fed members in recent weeks.

"Labor utilization would seem to be at a level that might eventually begin to put persistent and growing pressure on labor costs and prices," Meyer said. "As a result, the challenge for monetary policy, to the extent recent U.S. performance has been driven by temporary supply shocks, is to facilitate a transition from the current exceptional but unsustainable state ... prior to the supply shocks dissipating or inflation increasing by an unacceptable amount."

Meyer said a more accommodative stance is necessary, but he fell back on more established economic models that Fed-heads have discussed with less frequency lately. Even though Meyer was, as he stated, "speaking for himself," his speech could also be a deliberate attempt to blunt some of the more recent commentary by other Fed officials, to assert that the Fed is truly neutral, and hasn't simply changed its view outright.