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Treasuries Take a Third Step Back

Supply is the dominant theme, but Fed risk is playing a role too.

Treasuries lost ground for the third session in a row following last Thursday's speech by



Alan Greenspan

, in which he all but announced that the central bank will raise short-term interest rates when it meets next Tuesday and Wednesday.

Analysts blamed the move -- which came in a quiet session containing no market-moving economic data -- on Fed-related ennui and on the corporate new-issue calendar. Already heavy, the corporate calendar put on additional weight today with the addition of a $3 billion

Fannie Mae


deal and a $500 million

Freddie Mac


deal. Corporate issuers are stampeding to market in hopes of arriving before interest rates go any higher. Unfortunately, their stampeding puts pressure on bond prices,


interest rates to go higher.

The benchmark 30-year Treasury bond finished the day down 15/32 at 88 28/32, lifting its yield 3 basis points to 6.06%. Shorter-maturity notes underperformed slightly (their yields rose a little more).

The fact, or at least the firmly held opinion, that the Fed is on course to raise the fed funds rate from 4.75% to 5% can't be underestimated as a reason why the Treasury market is having a hard time, market watchers said.

"We had a relief rally after

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Greenspan's talk because it was not as aggressive as some had feared, so some shorts covered and some buyers who had been hesitating stepped in," said Kevin Logan, senior market economist at

Dresdner Kleinwort Benson

. Before Greenspan spoke, there was widespread fear that he would put the markets on notice that the Fed was worried about the inflation outlook, and to expect several rate hikes in quick succession. As it was, people were left wondering how sure they could be that the Fed will raise rates even one additional time.

"But," Logan continued, "you can't expect the market to improve with the Fed on a path toward tightening monetary policy."

At least not until it reaches what market participants are defining as the top end, in yield terms, of the market's current trading range. For the long bond, the line lies somewhere around 6.10%. Two Fridays ago, the long bond closed at its highest yield level in a year and a half, 6.16%.

Bounded on the low yield end by 5.90% or so, that trading range is probably good until the Fed meeting, when traders will be anxious to see whether the monetary policymakers, in their statement that accompanies policy changes, announce any change in their policy bias.

At their last meeting on May 18, the policy committee

announced that they'd shifted from a neutral bias to a bias in favor of a higher fed funds rate. This time, bond market mavens want to see whether they keep the tightening bias or revert to neutral. That'll help clear up the likelihood of additional tightenings. "If they maintain the bias it would certainly be bearish for the market, although I don't think it would be a huge down move," said David Ging, Treasury market strategist at

Donaldson Lufkin & Jenrette


Beyond the Fed statement, players are looking to the June

Purchasing Managers Index

a week from Thursday and the June

employment report

a week from Friday to provide economic data that may give the Fed a clear reason to either deliver or refrain from additional rate hikes.

In the meantime, supply concerns are dominant. The weekly corporate calendar swelled to $11 billion today with the addition of the Fannie and Freddie deals,

Thomson Global Markets

senior analyst John Atkins said, compared with an average of $6.2 billion a week over the last four. And while many of those deals aren't firm, there are already at least $3 billion of firm deals on next week's calendar, a very large number so far in advance. In addition, the Treasury's monthly auction of two-year notes takes place tomorrow, which Ging said will probably hamper prices at the short end at the yield curve for the next couple of days.