Treasuries Meander, Counting Down to Thursday

The yield curve steepens as buyers gravitate to short-maturity instruments.
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Treasury prices were little changed on little news this morning, as traders count down the days till

Fed

Chairman

Alan Greenspan's

congressional testimony on the economy and monetary policy.

With no economic indicators on the calendar and the other bond markets -- corporate, federal agency and foreign sovereign -- continuing to underperform, the benchmark 30-year Treasury bond was lately down 3/32 at 91 2/32, lifting its yield a basis point to 5.89%. Shorter-maturity Treasury notes were outperforming the bond. The two-year note, for example, was up 1/32, trimming its yield a basis point to 5.46%.

A large buyer of two-year notes this morning was likely taking profits on a trade in which the trader is effectively short the difference in yield between the 30-year issue and the two-year issue, said Ken Logan, managing analyst at

Thomson Global Markets

in Boston. That spread collapsed to 38 basis points on Thursday from 44 on July 7. This morning, it was back up to 43 basis points.

But the key dynamic in the credit markets this morning is the continuing divergence between the Treasury market and the other bond markets, which Logan says is essentially a function of supply and demand: shrinking supply of Treasuries, and a glut of many other kinds of bonds. "The market's improving, but it's the only market out of most bond markets out there that's improving," he said.

Based on strong economic fundamentals, which argue for corporate and other risky bonds outperforming Treasuries, many investors got "short Treasuries and long everything else," Logan says. But with supply and demand dynamics overwhelming the fundamentals, "it's not working. It's hurting them, and they're trying to work their way out." All this, Logan notes, is in the midst of "an information void, and a market that's on the defensive waiting for Greenspan."