Treasury prices were in positive territory at the end of a day that all but squashed the market's hopes of further short-term momentum from the Federal Reserve. The short-dated securities, which are more sensitive to revisions in near-term lending rates, had slipped in the morning session as traders realized they would probably have to wait until later in March for an interest rate cut. But along with the bonds, which finished more strongly, the notes firmed up by the closing bell.
The benchmark 10-year
Treasury note rose 11/32 to 100 22/32, lowering its yield 4.6 basis points to 4.91%.
Treasury bond rose 9/32 to 100 20/32, lowering its yield 2 basis points to 5.333%.
"Many people are realizing only now that it was a very big deal for the Fed to go for an interest rate reduction between meetings," said Carl Ericson, bond portfolio manager at
Colonial Mutual Funds
. He was referring to the move by the central bank to lower the
fed funds rate by half a percentage point on Jan. 3.
Ericson believes that chairman
Alan Greenspan and his team are signaling that they are fully aware of how the slowing economy is moving from month to month.
"The Fed feels it is on target as far as its strategy is concerned and knows what is going on. From the way things stand, we will get the reduction at the next policy meeting on Mar. 20 and the cut will be of 50 basis points," Ericson noted, observing that it was the equity traders who had overdone things in expecting a cut this week.
Greenspan today updated his Feb. 13 testimony before Congress. Speaking to the
House Financial Services Committee
, he once again
expressed concern about the economy, reiterating that he expects a slow recovery and possibly more dips before the eventual pickup. Though his words clearly point to further rate cutting, his remarks also snuffed out hopes that the central bank would move before its next scheduled meeting.
Ericson agrees that recently released economic data hints of some recovery in the economy, or as Greenspan put it, the slowdown is no longer as pronounced in January and February as it had been late last year. "The expected number on the GDP had been lower than how it turned out. Inflation is still OK. The NAPM that is coming out tomorrow will probably show a similar improving trend as that of the Chicago manufacturing number of today, though it will probably stay in the low 40s," he said.
The 10-, 7- and 5-year notes are reaffirming that things are on track, according to Ericson. Equities are, however, a different story. "They are getting lousy numbers and trading down on disappointment, not on news," he said.
He expects more "steepening" trades (in other words, he expects that the short-term notes will sell higher or the long bond will sell lower). "The real benefit is the spread product. The corporate and the high-yield bonds are very wide by historical standards, so there is a enough room for growth there," concluded Ericson, referring to the difference in yields between government issues and speculative money instruments. Traders often shift their portfolio positions toward the riskier side when enticed by high yields from the lower grade bonds. The increasing demand raises the selling price, sending the inversely related yields lower.
Chicago Board of Trade
, the March
Treasury futures contract rose 4/32 to 105 19/32.
In economic news, the revised reading of the
gross domestic product
), which measures the rate at which goods and services are produced in the nation, is at 1.1% for the fourth quarter of last year, its slowest growth since the second quarter of 1995, when it was 0.3% lower. Still, it is slightly above the 1.0% predicted by economists in the
Mortgage Applications Survey
) detected an increase in the purchase of new units but a decrease in home refinancing. For the week ended Feb. 23, the purchase index rose to 291.4 from the 274.3 in the previous week. The refinancing index fell to 2140.4 from 2346.1. Greenspan mentioned the relatively strong showing in home
and automobile sales as a sign that some sections of the economy are holding steady.
Chicago Purchasing Managers' Index
chart ) rose to 43.2 during February after falling to 40.2 for January. The gauge indicates a contraction in the manufacturing sector when below 50.
Currency and Commodities
The dollar rose against the yen and fell against the euro. It lately was worth 117.29 yen, down from 116.16. The euro was worth $0.9231, up from $0.9174. For more on currencies, see
Crude oil for April delivery at the
New York Mercantile Exchange
fell to $27.36 a barrel from $28.13.
Bridge Commodity Research Bureau Index
rose to 221.78 from 220.23.
Gold for April delivery at the
fell to $267.80 an ounce from $268.40.