Updated from 11:42 a.m. ESTLonger-dated Treasuries tracked higher Wednesday, and the yield curve remained inverted as traders awaited the upcoming housing data and next week's Federal Reserve policy meeting. "The market is higher, but we're not talking huge moves here," says Michael Darda, chief economist at MKM Partners. "The market is looking at a plateau in the fed funds rate at or around 5%." Fed funds futures show the market has priced in 100% odds that the Fed will raise rates by 25 basis points to 4.75% on March 28. Odds for a hike to 5% at the next meeting in May rose to 88% from 73% at the end of last week. The benchmark 10-year note ended the day up 4/32 to yield 4.70%, and the 30-year bond added 11/32 to yield 4.72%. Bond prices and yields move in opposite directions. The two-year note was little changed to yield 4.74%, while the five-year note was flat to yield 4.69%. While he managed to stay on topic, Fed chief Ben Bernanke's recent speech on the yield curve managed to flummox the market as much as his predecessor's gnomic remarks once did. In reaction, Wall Street has largely set it aside to focus on the upcoming Federal Open Market Committee meeting. "In the absence of surprisingly weak data, and housing will be key, next week's FOMC announcement is our next major inflection point," says Jonathon Lewis, principal at Samson Capital Advisors. The two-day meeting, scheduled for March 27-28, will feature several fresh faces, including newly minted Fed chairman Ben Bernanke and two new Fed governors, Kevin Warsh and Randall Kroszner. Fed Vice Chairman Roger Ferguson, who's stepping down in late April, won't attend the meeting.
The Mortgage Bankers Association said its mortgage applications index dipped by 1.6% last week. Purchasing applications fell by 2.3%, and refinancings slipped 0.6%. The fixed 30-year mortgage rate added 11 basis points to 6.31%. The Fed has raised interest rates at 14 consecutive meetings since June 2004, but that's done little to significantly boost the yield on the 10-year note. For the housing sector, this is important because the 30-year mortgage rate moves with the 10-year yield.
Supply also may be capping gains on the short end, with the Treasury set to announce Thursday the size of its upcoming two- and five-year note auctions. The auctions are scheduled for next week. On the corporate side, Lehman Brothers ( LEH) will sell $750 million in debt Wednesday, and Sierra Pacific ( SRP) will sell $350 million in debt Wednesday and Thursday.