US Treasuries prices will be pulled by two counter-weighing forces in the coming week, new supply that tends to push prices down, and investors whose hunger for safe-haven government debt tends to push prices up. The stock markets performance is likely to determine which of these two forces prevails. Each time stocks dip deeper into negative territory, the bid for Treasuries increases.
A convincing move up in stocks could lure investors toward riskier assets, to the detriment of Treasuries, which would then face two negatives: more supply and less demand for it. "The bond market is facing a tug of war between terrible economic numbers like the employment report we got today, which was positive for bonds, and a lot of supply, which is negative for bond prices," said Cary Leahey, economist at Decision Economics in New York.
A "flattish" February retail sales report, due on Thursday, would be mildly negative for bond prices, Leahey said. "But the market isnt really running on the economic numbers," he said. "Its running on fear while awaiting a believable plan on the banks."
Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York, said the weak economy isnt as direct an influence on bonds as it ordinarily would be. Instead, the weak economy story is viewed through the scrim of the stock markets reaction to it. "If the recession story hurts stocks, bonds will rally," Rupkey said. "If stocks have discounted it, the recession will not help bonds."
Supply would normally put a lot of downward pressure on prices, said Michael Moran, chief economist at Daiwa Securities America in New York. "Theres a tug of war going on right now," Moran said. "The stock market declines and the soft economy are pushing interest rates down and supply is pushing rates up; the two forces are fighting with each other."
Dealing with the refunding next week is the biggest job for bonds dealers, but its "the equity market that will be on everyones mind, especially financials and whether theres a bounce in equities," said Joseph LaVorgna, chief US economist at Deutsche Bank Securities in New York.
"If theres a bounce in equities, bond prices could come under pressure in light of the significant supply," he said. "But whether theres a bounce in equities is a very tricky call," LaVorgna added. "Even in bear markets, its rare to see the equity market behave the way it is behaving: relentlessly downward."
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