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Treasuries Fall as Equities Prosper

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Treasury notes and bonds fell for the second consecutive day as the money market reacted to signs of life among equities. At the same time, speculation that the

Federal Reserve will cut interest rates even before its next scheduled meeting on Jan. 31 gathered steam. Anemic commercial data released in the morning failed to stir bond traders, as such news has been frequent of late. Yields closed above yesterday's levels.

John Vail, chief strategist at

Fuji Futures

, thinks there is more "trickery" associated with the market than is apparent. "The bond market has clearly been rallying recently because of rate cuts ahead, but there are two factors that should be kept in mind. We are going to see a Bush tax cut, which will increase the budget deficit. And more importantly, there is the overriding 'recessionary' trend," he said. "We don't know if the equity market can pull out of it like it did in 1998. And the mixed emotions about that are causing bonds to be choppy."

He called credit quality, caused by heavy doses of corporate debt, another major concern.

Both Vail, and Scott Grannis, director and bond portfolio manager at

Western Asset Management

, strongly feel that the Fed will cut interest rates before its

Federal Open Market Committee meeting at the end of January. "The Fed is way out of step of the economic situation and seriously behind the easing curve," said Grannis.

Vail believes that stocks do not have to fall precipitously to make the Fed move earlier. If the stocks remain in their current state, look for the Fed to drop hints to major newspapers that an intervening rate cut is probable, he said. He noted, however, that stocks could help or hinder bonds. "It is unclear how the earlier rate cut would affect Treasuries. Sometimes, stocks go up and even out the spread on the yield curve."

The benchmark 10-year

Treasury note fell 13/32 to 104 25/32, raising its yield 5.2 basis points to 5.108%.

The 30-year

Treasury bond fell 13/32 to 111 18/32, raising its yield 2.6 basis points to 5.454%.

The remainder of the week should be quiet, with managers ironing out overbought positions in their portfolios. According to

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, a bond pricing service, major bond dealers exchanged only $13 billion by 3 p.m. EST today, 25% less than the average over the past 30 days.

"The market has already priced in most expectations and is temporarily swung on the upside. The only upcoming report that might move it markedly is the jobs data, out later this week," said Grannis.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 18/32 to 104 26/32.

Economic Indicators


index of leading economic indicators


definition |

chart |


) showed a decline of 0.2% in November, following a 0.3% drop in October. The year has so far seen six monthly periods of shrinking economic activity. While nondefense goods orders, building permits and consumer expectations shored up the index, higher jobless claims, lower work-hours, faster supplier deliveries, lower orders for consumer goods and a decrease in the

S&P500 pulled it down. Yet, as analysts caution, the downward pressure on the index should be kept in perspective, as it is lower by only 0.4% from a year ago


BTM-UBSW Weekly Chain Store Sales Index


definition |

chart ) rose 3.9% after three consecutive declines, benefiting from stronger sales just before the holiday. The

Redbook Retail Average


definition |

chart ) has December sales running at the same level as in November. The overall holiday shopping season remains the worst in four years.

The release of the latest

Mortgage Applications Survey


definition |

chart |


) has been delayed by a day.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 114.14 yen, up from 113.63. The euro was worth $0.9306, down from $0.9308. For more on currencies, see


Currencies column.

Crude oil for January delivery at the

New York Mercantile Exchange

remained unchanged at $25.77 a barrel.


Bridge Commodity Research Bureau Index

rose to 228.85 from 228.56.

Gold for February delivery at the


rose to $276.90 from $275.90.