The Treasury market remains under pressure this morning, despite the fact that stocks have given up their initial gains.
The prospect of having to absorb fresh supply today and in two weeks, when the Treasury will stage its quarterly refunding, issuing new five- and 10-year notes and 30-year bonds, has the market in a blue funk that won't lift till the refunding's done. That doesn't preclude rallies, it just makes them more difficult to achieve. The Treasury will announce the details of the refunding, including how much it intends to issue, sometime next week, probably on Wednesday.
After being down as much as 12/32 earlier, the benchmark 30-year bond was lately down 6/32 at 101 18/32, lifting its yield 2 basis points to 5.15%. Shorter-maturity note yields were mostly unchanged ahead of this afternoon's monthly auction of $15 billion of two-year notes. There are no major economic indicators today.
Traders' focus remains on emerging markets,
Credit Suisse First Boston
senior market economist Mike Cloherty said. "People are keeping one eye on the stock market, but the biggest factor is probably emerging markets."
Specifically, Brazil and China. In Brazil, the
stock index is rising again today, even as the currency weakens further in the aftermath of last week's decision to allow it to float. It was lately trading at 1.88 to the dollar, down from 1.82 yesterday. Regarding China, the question is whether the country will be able to maintain the value of its currency. The Chinese central bank governor today answered that in the affirmative, easing concerns if not fully putting them to rest.
Cloherty said emerging-markets jitters aren't doing more for the Treasury market for three reasons. Most important, he said, is the fact that compared to the last time emerging-market fever struck, "the system is less leveraged than it was then, so it's more able to absorb losses without triggering the kind of liquidation we saw in October."
Also, the economy managed to grow at a rate approaching 5% during the fourth quarter, in spite of the market turmoil (the government will release its advance estimate of fourth-quarter
gross domestic product
growth on Friday). "Brazil will feed back into U.S. growth estimates, but after seeing how well the economy was able to withstand the earlier round of financial turmoil, it makes it difficult to come out with weaker GDP estimates," Cloherty said.
Finally, he said, the fact that the Fed cut interest rates to calm the markets during the fall is curtailing the appetite for Treasuries by enabling stocks and risky bonds to hold more of their value.
Expectations as reported by