As with the prior day, strong economic data sent Treasury prices tumbling early Thursday, but equities once again largely ignored the tumult. But in a reversal of Wednesday's trends, Treasuries recovered from their early swoon and stock proxies ended modestly higher in another typical late-summer session.
Following strength in the core producer price index and another sub-400,000 reading in weekly jobless claim, the price of the benchmark 10-year Treasury plummeted over 5/8 point early Thursday, sending the yield as high as 4.65%.
"Any sense there's an elevation in core inflation pressures, no matter how moderate it may be, is a distinctly negative development given current bond market psychology," said William Sullivan, senior economist at Morgan Stanley.
But Treasuries rallied back sharply from their intraday worst levels, with the 10-year ending up 20/32 at 98 5/32, its yield falling to 4.48%.
Sullivan attributed the comeback largely to a "technical adjustment" ahead of Friday's settlement of the August refunding issues. "Today was not in any way a key reversal session," he said. "I don't believe there's a sea change in attitudes just yet
whereby a broad array of investors perceive value in Treasuries."
Given expectations for a moderate growth and low-inflation environment going forward, Sullivan actually does believe Treasuries represent value at current levels. "But market psychology is extremely negative and there's still downside price vulnerability over the period ahead," he said. "If the core rate in
Friday's July CPI is higher than expected, we're going right back down." (Consensus estimates is for core consumer price index to be up 0.1%.)
Amid the latest saga in Treasuries, equity traders largely acted like teen-agers on summer recess watching a lame horror movie: slightly interested but not emotionally vested in the outcome and all the while gorging themselves on empty calories.
Amid late-summer sluggishness, major averages ended toward the high end of tight intraday ranges. The
Dow Jones Industrial Average
rose 0.4% to 9310.46, the
gained 0.7% to 990.51 and the
climbed 0.8% to 1700.31.
Stock proxies traded in positive territory for most of the day and the White House confirmation of the capture of Indonesian terrorist known as Hambali gave shares a boost in the final hour of trading. He is suspected of directing bombings in Bali and Jakarta.
At 1.1 billion shares on the Big Board and 1.2 billion over-the-counter, trading volume remained subdued although breath was more clearly positive Thursday vs. recent session. Despite that, much of the stock-specific headlines of the day were negative situations, most notably
, which tumbled 24.3% after posting disappointing results,
, down 5% after similarly falling short, and
, off 1.7% after a Smith Barney downgrade.
Groups on the upswing included semiconductors, cyclicals and many of the rate-sensitive names that fell on Wednesday.
Ahead of its earnings report, shares of
rose 0.4%. After the bell, the PC-maker posted second-quarter earnings of 24 cents per share, in line with expectations.
What, Me Worry?
As alluded to above, a big question for many observers is why equities haven't responded more dramatically to the most recent spike in Treasury yields, Thursday's afternoon reversal notwithstanding. Skeptics say it's only a matter of time before stocks feel the sting of higher yields and that optimists are whistling past the proverbial graveyard.
"I think stocks, especially growth stocks, are still attractively valued relative to inflation expectations, where 10-year Treasury bonds are stillunattractively valued relative to those same expectations," countered Thomas McManus, equity portfolio strategist at Banc of America Securities.
Stocks are "more attractively valued" now than in April 2002, when the 10-year Treasury was at 5.5% and the expected 12-month change in the fedfunds rate was over 275 basis points, McManus continued. "We are a long way from worrying that the level of 10-year yields might interfere with stock valuations
and there's little evidence that the back-up in bond yields might cut off consumer spending."
Given the decline in refinancing activity as a result of rising yields, fair-minded people might disagree with that view. But recent retail sales data support the bullish argument, at least for now.
At 15%, McManus has one of the lowest recommended bond weightings among so-called major strategists, according to a survey by
. His recommendation of 75% equities is tied with several others as the second-highest. (At 89%, UBS Warburg's Edward Kerschner has the highest equity recommendation; coincidentally or not, he is leaving UBS at year-end.)
The rally in cyclical stocks "underscore our view that the markets are now beginning to build in more confidence of recovery" in the second-half of 2003 and into 2004, McManus said.
On a related note, Pimco managing director Bill Gross recommended Treasury Inflation-Protected Securities (TIPS)in his August 2003 "Investment Outlook" piece.
"These securities won't make you rich, but they'll protect your principal in the ensuing years and even stand a chance of going up in price over the near term," Gross wrote about TIPS. "Buy all you can. We have and will continue to do so."
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.