Treasuries Fall as Investors Take Some Profits

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After a show of strength for three days in a row,

Treasuries weakened significantly, especially at the long end. Investors sought profits by trimming overbought positions and set themselves up for the new debt schedule. Fixed-income securities were also hurt by the equity market, which began strongly because of better-than-expected earning announcements from prime tech movers. But though stocks cooled considerably late in the session, notes and bonds remained down.

The 30-year bond, which had led the Treasury rally over the week, suffered most. The price drop was less severe on shorter-dated issues, not altogether surprising since earlier maturing notes do better during a time of falling interest rates.

The benchmark 10-year

Treasury note fell 13/32 to 104 10/32, raising its yield 5.8 basis points to 5.17%.

The 30-year

Treasury bond fell 1 7/32 to 109 31/32, raising its yield 7.6 basis points to 5.555%.

"The market had a run-up like there was no tomorrow, so what happened today is not surprising," said Marilyn Cohen, president of

Envision Capital Management

. "It was a combination of profit-taking and the release of the new-issue calendar."

She added that traders had been pumped up for the latest agenda and were now in the act of squaring portfolios. "But there is really no big story on the macroeconomic front. The long bond has lost more than a point; still, that is not a big deal considering how much it had gained recently," Cohen said.

The latest trade data showed the deficit narrowing for the second straight month, a rare occurrence. A closer look, though, shows that

both

imports and exports decreased. Lower import numbers, attributable to reduced shipments in computers, telecommunications equipment and autos (and the drop in oil prices) reflect a declining demand in the domestic market. That in turn points to waning consumer confidence, duly borne out by an index

released today, the

University of Michigan's Consumer Sentiment Index

.

Also, according to chief economist Mike Moran of

Daiwa Securities

, adjusted for inflation, the trade deficit actually deteriorated during the fourth quarter last year and will subsequently drag down the quarter's

gross domestic product

(

definition |

chart |

source

). Moran's calculation was in a written statement that appeared today.

The California energy crisis continues.

Southern California Edison

defaulted on $32 million of commercial paper maturing on Thursday. (Its parent is

Edison International

(EIX) - Get Report

.) The utility will also be unable to pony up a Jan. 31 payment on another $223 million.

The short-term Band-Aid cobbled together by Gov. Davis and the legislature includes a helping hand of $400 million from the state's

Department of Water Resources

. This will be used to buy power for Southern California Edison and for the state's other major utility,

Pacific Gas & Electric

(a unit of

PG&E

(PCG) - Get Report

), saving them from bankruptcy.

Bond experts remain convinced the problem will remain localized and not threaten the national economy. "When something like this happened in the old days, we'd expect it to harm the overall bond market, but the general feeling now is that it'll be worked out," said Cohen, though she felt the governor had badly mishandled the problem.

A top

Federal Reserve official echoed Cohen's confidence about the general economy remaining untroubled by California's woes.

Federal Reserve Bank of Richmond

president Alfred Broaddus reaffirmed as well his office's trust in the economy's staying power. He said that while manufacturing was clearly hurting, consumer spending remained high, the housing market was still strong and the unemployment rate remained at 4%. But he admitted the Fed was ready to act decisively to avert any greater damage after the recent softening.

Richard Berner, economist at

Morgan Stanley Dean Witter

, was far less sanguine. In a report on the U.S. economy released today, Berner said, "So far, many demand and production gauges are consistent with the pattern seen in the early stages of a typical recession." Adding that the bottom was still "months away," Berner stuck with his forecast of a "mild and brief downturn followed by a brisk recovery."

These divergent views from public and private sector officials have lately not done much more than fuel speculation. Much more concrete and far-reaching will be the extent of the imminent interest rate cut. Notes and bonds have indeed been rebounding on renewed hopes that the Fed will lower interest rates by half a percentage point.

"The current probability of a 50-basis-point cut is more than 50%, but I won't be surprised if it is just 25 basis points. The Fed move earlier this month was an inoculation on the economy and its next one will very likely be a follow-up," said Cohen.

She also noted that the central bank had been getting a good look at all the economic information coming out. Additionally, the earnings outlooks for most corporations have been lowered as well, so the Fed's finger is no longer on the panic button, she said.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 1 1/32 to 103 23/32.

Economic Indicators

In economic news, the

international trade

(

definition |

chart |

source

) report showed that the deficit narrowed to $32.99 billion in November from a revised reading of $33.55 in the prior month. This is the first time since mid-1997 that the deficit has declined two months in a row. Imports as well as exports fell. The trade data however lags behind the latest news about the economy, and currently available numbers do not contradict the slowing of the nation's economic growth.

The

Consumer Sentiment Index

(

definition |

chart ) fell to 93.6 in January from 98.4 in December, its lowest level since Oct. 1998. The gauge measures the confidence consumers have in the economy for up to nine months.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 117.12 yen, down from 117.96. The euro was worth $0.9334, down from $0.9440. For more on currencies, see

TSC's

Currencies column.

Crude oil for February delivery at the

New York Mercantile Exchange

rose to $32.10 a barrel from $30.45.

The

Bridge Commodity Research Bureau Index

rose to 230.73 from 229.79.

Gold for March delivery at the

Comex

rose to $264.90 an ounce from $264.80.