Treasury prices rocketed higher today on news that broke yesterday concerning bonds issued by government-sponsored enterprises like Fannie Mae and Freddie Mac. Treasury market analysts said the trade -- buying Treasuries while selling so-called agency securities -- originated in overseas markets, which didn't get the opportunity to react to the news till today.
The benchmark 10-year Treasury note traded up as much as 23/32 and ended 9/32 higher at 103 2/32, dropping its yield 3.8 basis points to 6.082%, a level it hasn't closed below since Dec. 10. The 30-year Treasury bond rose as much as 1 14/32 and finished up 23/32 at 104 23/32, lowering its yield 5 basis points to 5.880%, the lowest since Aug. 26.
Chicago Board of Trade
, the June
Treasury futures contract gained 16/32 to 96 26/32.
Meanwhile, yields on agency securities (which are not to be confused with mortgage-backed securities issued by the same agencies) rose sharply relative to those of Treasury securities, indicating weaker demand for those securities. Freddie Mac priced a $5 billion 10-year reference note today at a yield 105 basis points over the 10-year Treasury. Earlier this week, it could have paid just 90 basis points over, said Jim Kochan, senior bond strategist at
Robert W. Baird
Agency securities dropped in price on comments that a
official made yesterday morning. Treasury under secretary for domestic finance
testified before a House subcommittee in support of a bill, introduced by
(R-Iowa), that could reduce demand for the securities.
One of the provisions of the bill would repeal a conditional line of credit the agencies have with the Treasury Department. But the lines of credit have never been used, and as Gensler said in his
testimony, their function has been "purely symbolic."
The more important element of Gensler's testimony from a market standpoint was his recommendation that Congress repeal agency securities' exemption from the rule that says banks cannot invest more than 10% of their capital in the obligations of any one issuer. In other words, banks currently can invest more than 10% of their capital in agency securities, and many of them do. Gensler said they shouldn't be able to.
In his testimony, Gensler said the $210 billion of agency debt owned by banks constituted over a third of their capital. His recommendation doesn't necessarily imply a huge drop in demand for agency securities, though, since under the rule a bank could invest 10% of its capital in the securities of each agency -- Fannie, Freddie and the
Federal Home Loan Bank
As important as Gensler's specific recommendations, though, was the overall tone of his speech, which to some market participants was interpreted as an assault on the notion that agency securities can replace Treasury securities as a global benchmark. That notion has gained currency in recent years as the U.S. government's budget surplus has led it to reduce the outstanding supply of Treasury securities.
The remarks implied that "Treasury is going to do its utmost to keep
agency securities from becoming the benchmark, because that creates moral hazard," said a Treasury market strategist at one of the primary dealer firms. In other words, the government may not want to see agency securities become benchmarks because that creates the impression that the government would bail out the agencies in the event of a crisis.
That point is key because the bill itself stands a poor chance of becoming law anytime soon, market participants say. Thanks to successful lobbying by the agencies, Baird's Kochan said, "these efforts have never succeeded in the past."
"Agencies have been trying to become the benchmark and every once in a while there's a question of moral hazard," agreed Jim Cusser, a bond portfolio manager at
Waddell & Reed
. "This is a pitch on the inside of the plate, but I think it's high and tight and had the desired effect of brushing the batter back."
There was selling of agency securities yesterday, but it wasn't accompanied by heavy buying of Treasury securities till today. "This happened when Asian accounts were asleep," the Treasury strategist noted.
The action in Treasuries caused the yield curve to invert even further. While long-term Treasury yields dropped sharply, the shortest-maturity Treasury, the two-year note, fell in price, sending its yield higher. The benchmark war between Treasuries and agencies is being fought at the more distant reaches of the yield curve. Also, the two-year note's yield is stuck at a relatively high level because it is more closely related to the
fed funds rate
, which the
is in the process of raising.
The mixed performance of the long- and short-maturity instruments sent the 10-year note's yield 45 basis points below the two-year note's, and the 30-year bond's yield 62 basis points below the two-year note's. Those degrees of yield curve inversion haven't been seen since March 1989.
Today's only economic indicator,
initial jobless claims
, showed a slight slackening on the labor market. Initial claims rose to 266,000 from 262,000 the previous week. However 262,000 was a 27-year low, indicating a very low rate of unemployment.
In addition, the
Federal Open Market Committee
minutes of its Feb. 1-2 meeting, at which it hiked the fed funds rate to 5.75% from 5.5%. They revealed that while there were no dissents from the decision, "A few members expressed a preference for an increase of 50 basis points in the federal funds rate in order to provide greater assurance against a buildup of inflationary expectations and inflation over coming months."
Currency and Commodities
The dollar gained against the yen and fell against the euro. It was worth 107.33 yen, up from 107.06 yesterday. The euro was worth $0.9713, up from $0.9610. For more on currencies, please take a look at
Currency Watch column.
Crude oil for May delivery at the
New York Mercantile Exchange
fell to $27.31 a barrel from $27.46.
Bridge Commodity Research Bureau Index
fell to 212.74 from 213.87.
Gold for April delivery at the
fell to $285.40 an ounce from $288.30.