US Treasury debt prices dipped on Thursday as reports of a stronger-than-expected US service sector and job market reduced expectations for a deep cut in official interest rates.
Major US retailers, led by discounters Wal-Mart Stores and Target Corp, contributed to the evidence of a still-growing US economy, reporting better-than-expected August sales as consumers shopped for back-to-school items despite higher gas prices and the nation's housing meltdown.
Analysts said stock market gains put some pressure on bond prices, though persistent signs of trouble in the mortgage market and remaining concerns about the availability of credit kept a floor under US government debt prices. Late in the day, the benchmark 10-year note had fallen 11/32 in price for a yield of 4.51 percent, compared with 4.47 percent late on Wednesday. Bond yields and prices move inversely.
"The economic data were a bit better, stocks are trying to gain some upside momentum and the Treasury market may be overbought," said William Sullivan, chief economist at JVB Financial Group. "The feeling is that the Fed does not want to operate on an inter-meeting basis so if you only get a 25-basis point rate cut in September, you might have to wait until the end of October to get the next 25 basis points," Sullivan said.
The Federal Reserve is expected to cut interest rates at its September 18 meeting. After Thursday's jobless claims, rate futures indicated traders are less certain the Fed will cut by 50 basis points.
Still, Treasury market losses were limited, given higher levels of foreclosures and delinquencies in the US mortgage market in the second quarter, developments that could weigh on future economic growth. Also, investors were hardly ready to abandon the relative safety of US government securities given continued stresses in the credit markets.
Partly in response to those difficulties, the Fed added a total of $31.25 billion in temporary reserves to the banking system via system repurchase agreements on Thursday. Earlier, the European Central Bank added 42.245 billion euros ($57.4 billion) in temporary overnight funds to money markets to ease tensions in the euro interbank lending market.
"The liquidity injections today were quite sizeable and the largest since the Fed injected $38 billion on August 10," said Stone and McCarthy Research Associates economist Kenneth Kim.
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