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.
The market: Join the discussion on
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
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
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
on Thursday. The data are the
Employment Cost Index
, 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,"
senior money market economist John Youngdahl said.