Treasury prices ended lower at the long end for the first time this week as equities began showing signs of life. In the absence of any major economic news, the money market has been lately reacting to stock movements. The 30-year Treasury fell more than the other securities, contributing to the rise in the yield curve.
The money market had started weaker this morning as traders remained worried about the potentially inflationary implications of higher-than-expected producer and consumer prices in January. Inflation reduces the chances of a near-term interest rate cut, which the bond market doesn't like.
The trend changed direction for some time during midday as equity indices touched two-year lows and attention turned to government securities as the safest investment vehicle. The government's repurchase of $1.75 billion in old bonds also lifted the 30-year Treasury. But bonds reversed once again as stocks narrowed losses by the end of the day.
The benchmark 10-year
Treasury note fell 10/32 to 98 22/32, raising its yield 2.5 basis points to 5.17%.
Treasury bond fell 20/32 to 97 23/32, raising its yield 4.2 basis points to 5.531%.
"The narrow range of the Treasury
price curve reflects the fact that Treasuries have factored in the falling stocks," said Fred Robertson, chief investment officer of
Criterion Investment Management
. He added that the coming week could see the narrowing of corporate spreads, referring to the differences in yields of government and speculative-grade bonds. "Given the current loosening in the monetary policy, they are too wide," he added.
Robertson thinks that bonds have not benefited quite as much as they might be expected to from the recent declines in stock prices, mainly because the flight-to-quality effect had already taken place. In his reasoning, one of the responsibilities of the
Federal Reserve's is to prevent stocks from falling too much, so the money market may have already absorbed most of the crossover investment in the belief that any further slide in equities will be checked..
Turning to a subject that has had money managers second-guessing themselves recently, Robertson believes that inflationary pressure will be minimized by the huge surplus capacity in the federal budget. Most analysts believe the drastic jump in January's producer and consumer prices was exceptional and not likely to be repeated. "The Fed does not care about it in the present circumstances anyway," he said, implying that interest rate easing will continue.
fed funds futures data indicates that the money market is certain of a half percentage point cut in short-term lending rates by the end of March.
Looking ahead to possibly influential data coming up over the next couple of weeks, Robertson said it would be part of the "chase" to stimulate monetary growth and loan activity.
Said Robertson: "The
Purchasing Managers' Index
) numbers have already bottomed and it will be worth watching how they do.
) are important as well, and we'll see if they hold on to their current rate." While the PMI number has been indicative of the manufacturing slump, retail sales have struck a more cheerful note since early January.
Consumer confidence and sentiment have also been a big concern for Fed chairman
Alan Greenspan, since they directly impact consumer spending, which is major part of the economy. Some economists downplay the importance of these indices as they are compiled from surveys rather than from hard data.
Robertson acknowledged the usefulness of the gauges in confirming the economic situation. "They are true, but they tell you what you already know. I think the
Nasdaq is a better indicator of consumer sentiment," he said.
Meanwhile, holding his first press conference at the White House, President Bush sounded confident about the economy's potential to exceed current expectations if steered correctly by the right balance of fiscal, monetary, regulatory and trade policies. "I believe we can do a heck of a lot better in growing our economy than the basic assumptions in the 10-year plan," he told reporters while reiterating the need to cut taxes in the short-term.
Chicago Board of Trade
, the March
Treasury futures contract fell 4/32 to 103 7/32.
In economic news,
initial jobless claims
), which track the number of people applying for unemployment benefits for the first time, rose to 348,000 in the week ended Feb.17. Although this is 4,000 more than the prior week's revised number, the figure is substantially lower than the 355,000 that economists had predicted in a
poll. The four-week moving average, however, climbed for the third consecutive week, to 350,750. Still, recent figures suggest that the string of layoffs may be drawing to a close.
The index of
leading economic indicators
), which forecasts economic activity more than half a year in advance, rose by 0.8% in January after having fallen for two consecutive months. The anticipated rise had been for 0.3%.
) fell by 3 points, to 76, last month. The gauge, which had a base value of 100 in 1987, tracks jobs openings in newspapers nationwide.
Consumer Comfort Index
chart ), which measures how consumers view the economy's direction and their participation in it, fell by a point, to 19, for the week ended Feb. 18.
Finally, the surplus in the
) rose to $76.38 billion in January from $32.67 billion in December. It is also $14.2 billion higher than the number from a year ago.
Currency and Commodities
The dollar rose against the yen and the euro. It lately was worth 116.99 yen, up from 116.55. The euro was worth $0.9041, down from $0.9092. For more on currencies, see
Crude oil for March delivery at the
New York Mercantile Exchange
rose to $28.80 a barrel from $28.53.
Bridge Commodity Research Bureau Index
fell to 220.61 from 221.36.
Gold for March delivery at the
rose to $258.50 an ounce from $258.20.