Treasury prices collapsed yet again today, pushing yields ever closer to the 18-month highs they reached two weeks ago.
The latest decline -- the fourth in a row -- was attributed to rising fear of interest-rate hikes by the
, the chilly reception that the monthly two-year note auction received (due in large measure to rising fear of interest-rate hikes by the Fed), and a corporate new-issue calendar that remains heavy even though
pulled what would have been the week's largest deal. There were no market-moving economic indicators on the calendar.
The benchmark 30-year Treasury bond ended the day down 31/32 at 87 30/32, lifting its yield 8 basis points to 6.14%. On June 11, the long bond closed at a yield of 6.158%, the highest since early November 1997. Shorter-maturity note yields rose by roughly similar amounts.
"The reason we've been going down the last few days is supply," said Gib Clark, manager of government bond trading at
Zions First National Bank
in Jersey City.
But if the heavy new issue calendar -- both in the U.S. and abroad -- is the general theme in the Treasury market these days, two specific factors helped force prices lower today.
The first was a quarterly
economic forecast by
UCLA's Anderson School
calling for the Fed to raise the fed funds rate from 4.75% to 5.50% over the next six months. While nearly everyone agrees that the Fed will raise the rate to 5% at its meeting next Tuesday and Wednesday, there is far less certainty about whether additional hikes will follow.
The ranks of people who believe the Fed will raise rates at least twice have grown in recent days, however.
Treasury market strategist Michelle Laughlin noted that fed funds futures contracts are discounting a 90% chance of a second rate hike in August today, up from 50% last Friday, "and most of that came today."
"It just underscores the anxiety and jumpiness of the market," Laughlin said. "It doesn't take much to get people nervous in this kind of environment."
The other force pushing Treasury prices lower today was the two-year auction itself, Laughlin said. Investors deciding whether to buy had to decide how sure they were that the Fed won't hike more than once. "There's going to be a lot of people saying, 'I'm not sure I want to make that bet,'" she said.
The auction itself was poorly received, although the notes rallied sharply after they were awarded. The Treasury sold $15 billion of notes at a yield of 5.754%. The results were considered poor because the awarded yield was significantly higher than where the notes were trading at 1 p.m. EDT, the bidding deadline (5.74% -- every basis points counts a lot in this situation). Also, the bid-to-cover ratio, the key measure of demand for new Treasury issues, was a record low 1.71, compared to an average of 2.13 for the last 12 two-year note auctions.
"I think the whole Street as well as customers want the market to do something right before they buy the market," said Matt Frymier, a two-year note trader for
Banc of America Securities
in San Francisco. "And the price action's been terrible all day. It's been terrible all week." Plus, Frymier said, recent two-year note auctions haven't been kind to buyers, who've seen prices crumble in the aftermarket.
Still, at 5.75%, the new twos were paying a larger premium to the fed funds rate than they have in years, attracting buyers after the pricing, Clark noted. As a result, the new twos rallied to around 5.70%.
In the corporate bond market today, the chatter was all about Ford, which delayed its deal amid rising Treasury yields and widening of the premiums that corporate issuers have to pay over Treasury yields because of the credit risk associated with their debt. Those premiums, or spreads, have widened as a function of supply. So many corporate issuers want to sell bonds that corporate bond prices are falling, forcing their interest rates higher.
Demand for Ford's deal was of "blowout proportions,"
Thomson Global Markets
senior analyst John Atkins said. But with spreads under pressure, Ford "couldn't get the kind of execution and upside in the secondary market that would validate it as the end-all and be-all for corporate bonds." Ford is breaking the mold for corporate issuance with its latest program by announcing a plan to sell $10 billion of notes this year in installments, of which this week's deal was to have been the first.