US Treasury debt prices retreated further on Monday, sending benchmark yields to four-month highs as the breaking of a key technical barrier cleared the way for a more acute selling spell.
Gloomy market sentiment kept bonds under pressure throughout the session, but the downward momentum accelerated after bears managed to push benchmark yields above 4.42 percent. Ten-year notes slipped 10/32 in price for a yield of 4.44 percent, with traders looking at 4.50 percent as the next support level.
"If we break that level it'll be very ugly," warned Mary Ann Hurley, senior Treasuries trader in Seattle, Washington, for D.A. Davidson.
Spotty demand for the first leg of the Treasury's three-part refunding also depressed government debt. Dealers were particularly alarmed by the striking absence of indirect bids, a category that includes foreign central banks.
Treasuries have taken quite a whipping over the past two months, with benchmark yields spiking 40 basis points higher as expectations of an economic soft patch gave way to hopes for stronger growth in the second half of 2005.
A barrage of positive economic data has convinced investors that the economy is on a strong enough footing to allow the Federal Reserve to continue raising interest rates for a considerable time to come.
Coupled with upward revisions to inflation, the numbers are shifting the focus of the interest rate debate from a discussion about when the Fed could pause to a debate about just how far it might go, analysts said.
"The minutes of the upcoming meeting may show that a search for neutrality is being replaced by an inquiry into whether FOMC policy will need to turn restrictive in the coming quarters," argues Bruce Kasman, global head of economic research at J.P. Morgan.
Fed forecasters have adjusted their expectations for further monetary tightening accordingly to reflect a chance the central bank might actively nudge rates higher well into 2006. While bond prices have fallen significantly in recent weeks, that was apparently not enough to attract foreigners to a sale of $18 billion in three-year notes. The issue was sold at a high yield of 4.204 percent and garnered 2.31 bids per dollar of debt on offer. That was short of the 2.38 achieved at the most recent three-year auction in May, but above the 2.15 average in the four three-year auctions of 2004.
But indirect bidders took home only $5.00 billion, or 28 percent of the auction, leaving dealers to figure out what to do with the rest.
"Foreign central banks tend to like the short-end, so if they were going to buy this refunding at all they would have come to this one," said D.A. Davidson's Hurley. "So this is not a good sign for the upcoming five- and 10-year sales," she said.
Those maturities, $13 billion worth of each, will be up for grabs on Wednesday and Thursday. Current three-year notes fell 5/32 and were yielding 4.20 percent, while two-year debt eased 3/32 for a yield of 4.17 percent - a new four-year high.
As the Fed prepared for Tuesday's policy meeting, which is expected to result in another quarter-percentage-point increase in the target federal funds rate, traders were treading cautiously.
Their reticence pushed five-year notes down 7/32 for a yield of 4.29 percent, compared with 4.23 percent on Friday.
The 30-year bond was off 11/32 and yielding 4.60 percent.
Comments
Comments are closed.