Treasuries Pare Losses in Technically Driven Trading - TheStreet

Treasuries Pare Losses in Technically Driven Trading

Buyers stepped in at nice, round yield levels -- 6.40% on the 30-year issue, 6.25% on the 10-year and 6% on the 2-year.
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The Treasury market pared its early losses today in what market analysts labeled a short-covering rally. The rally began when prices dropped to levels that brought some of the highest yields Treasuries have offered in more than two years.

No major economic indicators were released today, but among the other factors that can influence bond prices (such as the dollar, oil and commodities in general), gold provided some decisive support, closing below 300 an ounce for the first time since Sept. 27.

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The benchmark 30-year Treasury, after trading down as much as 24/32 shortly after 11 a.m. EDT, ended the day down just 2/32 at 96 31/32, its yield unchanged at 6.35%. Shorter-maturity notes didn't fully participate in the rebound. Their yields rose by a basis point or two on the day.

"It was basically a technical rally,"

Stone & McCarthy Research Associates

Treasury market analyst John Canavan said. The rally started, he said, when the long bond rose beyond 96 16/32 and the corresponding December futures contract

listed on the

Chicago Board of Trade

surpassed 110 20/32. "Both small technical moves set off some short-covering stops, and the rally just fed on itself in thin trading." Translation: Those were price levels at which traders with short positions had previously decided to unwind those positions by buying them back.

At the same time, the rally began at some nice, round yield levels at which some investors had likely flagged as entry points: 6.40% on the long bond, 6.25% on the 10-year note, and 6.00% on the two-year note. "We've come an awfully long way in a fairly short period of time," Canavan said of the rising yields.

Also supporting the market today was analysis of the latest biweekly

Commitments of Traders

report from the

Commodity Futures Trading Commission

, released Friday after the bond futures market's 3 p.m. EDT close, said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. The

report showed a new record high level of short interest in the bond futures contract on the part of speculators, who Crescenzi says historically have tended to take extreme positions in the direction the market has been moving shortly before it reverses course. "It could be a sign of excessive pessimism," he said.

But while bond and note prices rebounded this afternoon, the fed funds futures contracts listed on the CBOT priced in a slightly higher likelihood of another rate hike by the

Fed

at its next meeting on Nov. 16. The implied odds rose to 69%, from 64% on Friday, in spite of weaker-than-expected performance by the day's only economic indicator, September

existing home sales

. Existing home sales slipped to a 5.13 million pace, the slowest since May, from 5.24 million in August.

Hawkish comments by

European Central Bank

chief economist Otmar Issing overnight contributed to the shift in sentiment about the Fed.

Reiterating comments he made earlier in the month, Issing said the risks to price stability in the Eurozone are "slowly changing from the downside to the upside." Higher interest rates in Europe to control inflation could weaken the value of the dollar, an inflationary development that could prompt the Fed to hike U.S. rates.

The fact that today's action in Treasuries was on light volume highlighted the fact that the market is in vigil mode for key economic data and a speech by Fed Chairman

Alan Greenspan

on Thursday. The data are the

Employment Cost Index

and

GDP

, both for the third quarter. The ECI is the government's most comprehensive measure of wage inflation, and a stronger-than-expected reading could justify a rate hike, the thinking goes. Greenspan will speak after the markets close.

"Thursday is definitely a 24-hour period that should stand out as the center of the market's focus this week,"

Goldman Sachs

senior money market economist John Youngdahl said.