Treasuries Extend Losses on More Strong Data

The numbers weren't much stronger, but they were supposed to be weaker.
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On very light summer-Friday volume, the Treasury market extended its losses. It was a question of minor but stronger-than-expected economic data hitting a sparsely populated market where buyers were in particularly short supply.

The benchmark 30-year Treasury bond ended the day 14/32 lower at 88 11/32, lifting its yield 4 basis points to 6.11%, its worst close since June 26. Shorter-maturity note yields rose by roughly similar amounts. The two-year Treasury note, for example, saw its yield rise from 5.60% to 5.63%.

So the Treasury market is in pretty bad shape as it heads into next week, which brings two extremely important economic reports -- the

Purchasing Managers' Index

on Monday and the

employment report

on Friday, both for July. Traders are looking to those reports to resolve the question of whether the

Fed

will hike interest rates again at its next meeting, Aug. 24.

The market's deterioration over the last week and a half has coincided with a shift in sentiment, from the view that an August hike is unlikely to the view that the odds favor it. Based on comments by Fed Chairman

Alan Greenspan

this week and last in his

Humphrey-Hawkins

testimony, many market-watchers feel it will take downright weak economic reports to stay the Fed's hand next month.

The market got pushed a bit further in that direction today by the

new home sales

report for June and the

Chicago Purchasing Managers' Index

for July.

New home sales, while still well below their November peak of 985,000, rose 3.1% to a seasonally adjusted annual pace of 929,000, from 901,000 in May. Economists surveyed by

Reuters

had predicted a slowdown to 892,000, on average.

Coming on the heels of Monday's announcement that

existing home sales

rose 10.6% in June to a all-time high pace of 5.53 million, "it's showing us that demand for housing is running at an unsustainable pace,"

Dresdner Kleinwort Benson

market economist Claude Persico said. "One rate hike is not going to do it," he added, referring to the Fed's June 30 hike in the fed funds rate target to 5% from 4.75%.

Meanwhile, the Chicago PMI, a measure of manufacturing sentiment in the Midwest that sometimes predicts the course of the national PMI released a day or two later, advanced to 60.5 from 60. A small advance, but the consensus estimate called for a pullback to 58.8. As of today, the consensus estimate for the national PMI calls for a pullback to 55.7 from 57. For both indices, readings over 50 signify manufacturing sector growth.

Both reports also have a sub-index that measures prices paid by manufacturers, and the Chicago report's rose from 57.2 to 59.8. But Persico says the good behavior of consumer prices to date is keeping the primary focus on numbers with something to say about possible future inflation.

"Prices are important, but the Fed is focused on domestic demand right now," he said. "The demand indicators are going to tell whether the Fed moves policy. The inflation indicators are going to tell how many times they move it, and by what magnitude."

But if the fundamental influences on trading were negative, the Treasury market was also very easy to move today, with many players apparently taking the day off. Volume was more than 20% below average for a Friday in the past month from 8 a.m. to noon EDT, the heart of the session, according to tracker

GovPX

.

"There's nobody to absorb any kind of supply either way," said Gib Clark, manager of government bond trading at

Zions First National Bank

in Jersey City, N.J. It's a summer-Friday condition, Clark said, "mixed in with the fact that the market has gone into an overall negative mode."

Why so glum? "There's no more talk of no more tightening," Clark said. "On TV, everybody's saying there's two more

rate hikes coming."

In addition, it's that time of the quarter for the Treasury market -- quarterly refunding time. The auction of new long-dated bonds and notes is set for Aug. 10-12, and next week the Treasury will announce how much it will sell of new five-, 10- and 30-year notes and bonds.

By itself, the approach of the refunding doesn't move prices lower. That's especially true since the federal budget deficit turned into a surplus last year, putting the Treasury market on a long-term course of declining supply. Also, with yields so much higher now than the last time the Treasury sold long-dated paper, there's no reason to believe investors won't be interested in them, Persico said.

But it certainly gives the dealers who are going to bid on the new bonds and notes an incentive not to support prices in the meantime. "If we start getting weak before the auction for whatever reason, there's nothing to compel anyone to buy and stop the downtick," Clark said.