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Treasuries Walloped as Agencies Finally Find Buyers

Meanwhile, Treasuries had become extremely expensive.

The Treasury market got slammed today, as some investors decided that agency securities had finally gotten cheap enough to warrant shifting some money out of Treasuries and into agencies. Further encouraging that move, Treasuries had become extremely expensive.

Yesterday, Treasury yields dropped to their lowest levels of the year.

However the gains moderated in the late afternoon, as money flowed out of the

Nasdaq Stock Market

. There were no major economic releases, and while

Fed Chairman

Alan Greenspan gave a

speech, he didn't broach the subject of monetary policy.

The action lifted long-term yields to their highest levels in nearly a week. The benchmark 10-year Treasury note fell 27/32 to 104 17/32, lifting its yield 11.1 basis points to 5.884%. The 30-year bond fell 1 18/32 to 106 25/32, boosting its yield 10.1 basis points to 5.771%. Shorter-maturity yields rose by comparable amounts.

At the

Chicago Board of Trade

, the June

Treasury futures contract fell 31/32 to 98 12/32.

Agency securities are bonds issued by government-sponsored enterprises including

Fannie Mae


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Freddie Mac


, and over the last month, they've lost a tremendous amount of value due to initiatives to reevaluate the implicit federal guarantee they enjoy.

Today, some investors decided that enough was enough. The difference in yield between a five-year agency security and a five-year Treasury, which stood at around 50 basis points early this year, ended last week around 80 basis points and briefly got to 90 this morning, before narrowing by about five basis points.

The buying of agency securities was triggered by a morning appearance by Rep.

Richard Baker

(R-La.) before the House Banking Committee. Baker is sponsor of a bill that would strip GSEs of some of the advantages they currently enjoy.

The bill is widely expected to fail, at least this year. Still, agencies have proven susceptible to tough talk by government officials. So in anticipation of Baker's testimony, agency spreads widened over the previous few sessions.

Then, in what one market analyst called a classic example of sell-the-rumor-buy-the-fact, people started buying agencies as soon as Baker's comments were made public. Baker told the committee that investors were still ignoring "repeated admonition" that agency debt is not backed by the federal government.

Buying of agencies was accompanied by selling of Treasuries because that is how traders made bets on a narrowing yield spread between agencies and Treasuries.

At the

Chicago Board of Trade

, where this transaction can be accomplished using futures contracts, the TAG (Treasury-agency) spread got as wide as 6 29/32 this morning, before collapsing to 6 4/32.

Agencies "are at really, really wide levels," said Maryann Hurley, vice president in trading at

D.A. Davidson

in Seattle. "Unless you think

Baker's legislation is going to get passed this year, they've widened so far that they really make sense."

By the same token, Hurley continued, "Treasuries have gotten extraordinarily expensive. They have the worst news for stocks built in and a whole lot of buybacks for Treasuries." The

Treasury Department

is in the process of using federal government surplus funds to retire debt by buying securities back from investors. Over the last two months, that has made long-term Treasuries in particular collector's items, and driven up their prices.

But the rally went too far, Hurley says. Unless the Treasury buys back $5 billion of long-term Treasuries this month (it bought back $2 billion last month) and further reduces its auction schedule, the market is overpriced, she says.


Miller Tabak

chief bond strategist Tony Crescenzi pointed out that signs of speculative excess had been building in the Treasury market. At the CBOT, speculators had amassed significant net long positions in Treasury futures, according to the latest biweekly Commitments of Traders report from the

Commodity Futures Trading Commission

, released on Friday. Large net long positions by speculators frequently mark high points in prices.

"These developments help to shed light on the vigor behind today's sharp selloff in the U.S. Treasury market," Crescenzi wrote in a research note.

Economic Indicators

The weekly retail sales reports rebounded sharply in the first week of April, as Easter-related purchases stepped up.


BTM/Schroder Weekly Chain Store Sales Index rose 0.9%, its biggest gain in eight weeks. The year-on-year pace rose from -2.0% to -1.2%.


Redbook Retail Average gained 1.7% during the first week of April vs. the entire month of March, and the year-on-year pace spiked to 7.6% from 0.8%.

Currency and Commodities

The dollar gained against the yen and the euro. It lately was worth 107.00 yen up from 106.43. The euro was worth $0.9584, down from $0.9624. For more on currencies, please take a look at



Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

rose to $24.14 a barrel from $23.85.


Bridge Commodity Research Bureau Index

fell to 208.29 from 208.60.

Gold for June delivery at the


fell to $283.70 an ounce from $284.00