US Treasuries stumbled lower on Monday as negative technicals were exacerbated by expectations of optimistic testimony to Congress this week from Federal Reserve Chairman Alan Greenspan. Benchmark yields hit two-month highs even as inklings of an upbeat Fed chief emerged in his written response to questions from the chairman of Congress' Joint Economic Committee.
In the July 11 letter, Greenspan wrote that the economy appeared to be "coping pretty well" with the latest energy shock, although he admitted that oil would likely shave about 0.75 percent off US gross domestic product growth in 2005.
While his remarks, which were released on Monday, contained little news they were enough to give bears the upper hand in a market that is noticeably nervous that Greenspan will offer an unequivocally positive view of the economy.
"Greenspan's comments do seem to show optimism on the economic situation, and they pertain to themes that he might touch upon in his testimony," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.
Anxiety over this prospect helped push benchmark 10-year notes 12/32 lower for a yield of 4.22 percent - its highest since early May and up from 4.17 percent on Friday.
A break above 4.19 percent, the note's 200-day moving average, pointed to a worsening chart environment for bonds.
"The fact that it's broken it opens up further risk to the downside," said Crescenzi, who outlined 4.30 percent and 4.40 percent as the next key resistance levels.
Two-year debt was down a mild 1/32 in price, but that was enough to nudge yields to a four-year high of 3.89 percent, up from 3.86 percent Friday.
With the selling tilted predominantly in long-term securities, the yield curve was steepening. Spreads between 10- and two-year debt widened to 33 basis points from 30 on Friday.
Thirty-year bonds slid 1-5/32 for a yield of 4.47 percent, up from 4.40 percent Friday. Five-year notes retreated 5/32 and were yielding 4.02 percent from 3.98 percent.
A report on capital flows into the United States in May was about the only piece of economic data out on Monday.
While the TICS data do not usually move the market, participants took notice of a steady decline in Treasury purchases from foreign central banks that matches a trend seen in the Fed's weekly custody holdings figures.
Overall, net capital inflows grew to $60 billion in May from $47.8 billion in April, toward the low end of the range predicted by Wall Street analysts.
Foreign buying of US Treasury securities rose to $27.58 billion, after $24.69 billion worth of net purchases in April. But official buying of Treasuries, meaning foreign central banks, eased to $6.8 billion from $13.9 billion. Private investors picked up the slack, buying $20.8 billion compared to $10.8 billion.
Still, the drop-off in foreign central bank interest was worrying considering these offshore institutions hold over a quarter of the Treasury market.
Concern over the slow decline in foreign interest paled in comparison to the imminent hurdle of a double appearance from Alan Greenspan.
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