Treasury Yields Rise Again as Shift Back to Agencies Continues

Harsh words from Fed governor Meyer also prompted some selling.
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Treasury prices collapsed for a second consecutive day, lifting intermediate and long-term yields to their highest levels since the beginning of the month, as traders continued to unwind their bets that Treasuries would outperform agency securities.

Tough talk by

Fed Governor

Laurence Meyer

also weighed on the market. There were no market-moving economic releases.

The benchmark 10-year Treasury note ended down 13/32 at 104 4/32, lifting its yield 5.5 basis points to 5.939%, the highest since April 3. And the 30-year bond fell 22/32 to 106 5/32, raising its yield 4.7 basis points to 5.814%, the highest since March 30. Shorter-maturity yields rose by comparable amounts.

At the

Chicago Board of Trade

, the June

Treasury futures contract fell 20/32 to 97 24/32.

For much of the session, yield differentials between Treasury and agency securities appeared to be the Treasury market's focus.

Over the last several weeks, the yield differences between Treasuries and agencies have grown as Treasuries have outperformed agencies. Over that period, some traders profited from the spread widening by simultaneously owning Treasuries and being short agency securities. Now, they are taking profits on that trade by selling the Treasuries and buying back the agencies.

Throughout the trading session, the price movements of Treasury securities and Treasury futures closely tracked the Treasury agency spread, which rises when Treasuries are outperforming agencies and falls when agencies are outperforming. In other words, the fall in Treasury prices today was accompanied by, and possibly a function of, outperformance by agency securities.

Agency securities are bonds and notes issued by government-sponsored enterprises including

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

.

There was also a key technical aspect to today's trade in Treasuries, noted Walter Burke, chief technical analyst at

MCM Moneywatch

. Although Treasuries pared their losses as the major stock proxies spiraled lower in the last hour of trading, they have stopped going up in response to major weakness in the stock market for a technical reason, he said. The Treasury bond futures contract completed a so-called double-top yesterday, then broke through a key support level at 98 today.

In addition, Burke said, the fact that in yield terms the Treasury bond has retraced about 50% of the rise in yields from October 1998 to mid-January suggests that the low yields for the year, reached on

Monday , may not be seen again for "for the next several months."

Then there were the Meyer

remarks. Speaking to the

Toronto Association for Business and Economics

, Meyer outlined reasons why the Fed is likely to continue hiking interest rates, even in the absence of a marked acceleration in inflation. "

The balance of aggregate demand and sustainable supply today and the distinct possibility that labor and product markets will tighten further suggest an unacceptable risk of overheating and, therefore, higher inflation in the future," he said.

But at the same time, Meyer, who is widely regarded as one of the most hawkish

Fed officials, suggested that there is no immediate need for the Fed to hike rates more aggressively than it has been. "To the extent that incoming data only gradually alter perceptions of the appropriate policy stance, only gradual policy adjustments will be called for," he said.

Economic Indicators

Import and export prices rose in March, the

Bureau of Labor Statistics

reported this morning. Import prices rose 0.3%, lifting the year-on-year pace to 9.4%, the fastest since the BLS began tracking them in the early 80s. Oil prices are largely responsible, though. Excluding oil products, import prices are rising at a rate of just 1.0%, the fastest since January 1996.

Export prices rose 0.4%, lifting the year-on-year pace to 2.2% from 1.4%.

The weekly

Mortgage Applications Survey detected increases in both refinancing and new mortgage activity. The Refinancing Index rose to 364.2 from 340.6, while the Purchase Index rose to 316.6 from 293.5.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It was last worth 105.78 yen, down from 106.92. The euro was worth $0.9584, down from $0.9589. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for May delivery at the

New York Mercantile Exchange

rose to $25.41 a barrel from $24.14.

The

Bridge Commodity Research Bureau Index

rose to 210.29 from 208.29.

Gold for June delivery at the

Comex

fell to $283.50 an ounce from $282.70.