With only a little help from the sagging stock market, Treasury prices moved higher for a second consecutive day, benefiting chiefly from a short squeeze after the Treasury Department sold new 10-year notes to dealers, market watchers said.
The yield at which the department sold the notes -- 6.475% -- was slightly lower-than-expected, indicating that some market participants had expected to win securities at higher yields (lower prices). If they had short positions to cover, they were up a creek. They had to pay up to do so, and their buying lifted the market even higher.
The benchmark 10-year Treasury note ended up 20/32 at 100 14/32, dropping its yield 8.6 basis points to 6.438%. Shorter-maturity notes fell by roughly similar amounts. The 30-year Treasury bond gained 27/32 to 101 10/32, lowering its yield 6 basis points to 6.154%.
Chicago Board of Trade
, the June
Treasury futures contract gained 20/32 to 94 2/32.
At the 1 p.m. EDT bidding deadline for the new 10-year notes, the benchmark issue was up just 11/32.
At the deadline, the existing 10-year note traded at a yield closer to 6.50%, indicating that some market participants expected to be awarded the notes at that level. In another indication of strong demand, the bid-to-cover ratio, which compares the volume of securities bid for to the amount offered for sale, was 2.62, the highest since the Treasury Department switched to its current format for 10-year note auctions in November 1998.
The department sold $8 billion of new notes. Rather than creating a brand-new 10-year security that would have matured in May 2010, the department added securities to its last 10-year note, creating additional securities that will mature in February 2010. The additional securities should improve the liquidity of the issue.
Prices rose after the auction,
Paribas Capital Markets
senior bond strategist Richard Gilhooly said, because "there was a big short base going into the auctions, but the auctions weren't difficult, in fact they went very well, so the market got squeezed up afterwards." Because the notes were awarded only to bidders who had agreed to accept a yield of 6.475% or lower, "if you bid 6.50% you got no paper, so you had to chase the market higher after 1 o'clock," Gilhooly said.
The stock market's weakness today helped the Treasury market slightly, but only slightly, market analysts said. Gilhooly noted that there was no outperformance by short-maturity Treasuries today, which one would expect to see in a rally driven by flight from stocks, since the shortest-maturity issues are the most liquid.
There has been a fundamental change, analysts said, in the general perception of how much power stock prices have to influence the
Fed on interest rates.
Federal Open Market Committee "is not going to not raise rates because the Nasdaq drops by 200 points," said Tom Connor, head of government bond trading at
. "In early April, people thought that was a possibility." Rather, Connor said, "stocks being up is one of the problems in the economy, and they're going to have to deal with it."
Rapidly rising stock prices are troubling to the Fed when the economy is growing at an above-trend clip, threatening to ignite inflation, because it is presumed that quickly rising stock prices embolden consumers to spend, and consumer spending is the main driver of the economy.
Uncertainty about how much the Fed will hike the
fed funds rate over the coming months is also keeping Treasuries from rallying, Connor said. "How excited do you want to get about the bond market when the funds rate is going up by 50" basis points at the FOMC's next meeting on May 16, and possibly by another 50 basis points at the subsequent meeting in June, he said. The funds rate currently stands at 6%.
"The accepted view now is that the Fed is not watching stocks, it's just doing what's necessary on rates," Gilhooly concurred. Of course, he added: "It's a question of the magnitude of the fall. If stocks were to fall another 5% or 10%, it might be a different story."
In the meantime, Gilhooly thinks intermediate- and long-term Treasury yields will continue to improve now that the quarterly refunding auctions are over -- aided by Treasury Department buybacks of old long-maturity issues. "We think the Treasury market is very, very cheap right now -- 20 basis points on the bond, at least."
There were no major economic releases or other events of interest to Treasury traders today.
Mortgage Applications Survey detected increases in both refinancing and new mortgage activity, in spite of an uptick in the average mortgage interest rate. The Refinancing Index rose to 357.7 from 336.2, while the Purchase Index rose to a 19-month high of 341.2 from 299.4. In the same week,
30-year mortgage rate rose to 8.28% from 8.13%.
Currency and Commodities
The dollar gained against the yen and the euro. It lately was worth 109.51 yen, up from 109.24. The euro was worth $0.9068, down from $0.9073. For more on currencies, please take a look at
Crude oil for June delivery at the
New York Mercantile Exchange
fell to $28.10 a barrel from $28.65.
Bridge Commodity Research Bureau Index
rose to 218.93, nearly a two-year high, from 217.13.
Gold for June delivery at the
rose to $278.70 an ounce from $278.20.