US Treasuries sink under weight of corporate supply
By Andrew Priest
NEW YORK, June 23 (Reuters) - Longer-dated U.S. Treasuries fell to their lowest levels in three weeks on Friday as corporate supply and robust oil prices outweighed optimism the Federal Reserve will leave interest rates on hold next week.
The 30-year Treasury bond's price extended its loss to a full point in late morning trade, pushing its yield above 6 percent for the first time this month.
``With all the corporate deals, rate locks have been going on and the technicals have flipped to negative so there are plenty of long liquidations,'' said a head trader at a New York primary dealer. In trades known as rate locks, corporate issuers often sell Treasuries ahead of deals to hedge against potential price falls.
Two deals weighed on Treasury prices particularly longer-dated government issues.
Tennessee Valley Authority, the largest U.S. wholesale producer of electricity, sold $1 billion in 30-year power bonds and Valero Energy Corp. sold $400 million in debt. The latter in a two-part sale which included $200 million in 30-year bonds.
``There is some hedging in Treasuries against this new corporate supply but the market was overbought last week and so we are also getting some consolidation going into the Fed meeting next week,'' said Bill Sullivan, money market economist at Morgan Stanley Dean Witter.
By midday, the 10-year note was off 19/32 at 102-7/32, yielding 6.19 percent, its highest yield level since the beginning of June. Two-year notes were off 3/32 at 100-5/32 to yield 6.54 percent and five-year notes were down 7/32 to 101-18/32 to yield 6.37 percent.
The September T-note future was off 13/32 at 97-11 and the T-bond future was off 21/32 at 95-28. Cash 30-year bonds were off 1-1/32 at 102-28/32 to yield 6.04 percent.
``We are at some critical support levels now,'' Sullivan said.
A break of the June 14 96-9 low on the long bond future contract accelerated selling in both cash and futures, traders said.
Deutsche Telekom AG, Europe's largest phone company, is expected to sell at least $8 billion of bonds early next week, with around $5 billion of bonds denominated in dollars, about $1.5 billion denominated in euros, and $750 million each denominated in sterling and yen.
Further U.S. dollar weakness also weighed on Treasuries, analysts said. The dollar earlier slid to fresh two-month lows below 104 yen.
The Japanese yen has been fuelled by expectations that Japanese interest rates will rise as economy recovers and the absence of intervention to hold back the currency ahead of Sunday's Japan elections.
Optimism that the Fed will hold off from raising interest rates next week did little to cushion Treasury price falls, analysts noted.
Washington Post reporter John Berry, a widely read Fed watcher, wrote in Friday's edition that Fed officials were likely to keep rates on hold next week. Policymakers were also likely to say they continued to be more concerned about rising inflation than about signs the economy was slowing, he added.
Wall Street dealers forecast the Fed's Open Market Committee will take a breather next week in its year-long credit-tightening campaign. But many expect a return to rate hikes as soon as late August, a Reuters poll showed late Wednesday.
Eight of the 29 primary dealers which deal directly with the Fed said they expect another half percentage point boost in the federal funds rate at the Fed's August 22 meeting.
The Fed hiked rates by an aggressive 0.50 percent at its last meeting on May 16 and the rate which bank charge each other for overnight loans stands at a nine-year high of 6.50 percent.
A stream of recent reports showing a moderation in the fast-paced U.S. economic expansion has backed optimism that rates will stay on hold in the short-term. The evidence has come from a number of sources including private payrolls, housing, autos, durable goods and manufacturing reports.
World oil prices climbed further on Friday despite an agreement among major oil producers on Wednesday to raise global supply by three percent.
U.S. benchmark August crude futures stood 11 cents up at $32.30 per barrel.
Saudi Arabian Oil Minister Ali al-Naimi said he felt that oil prices were too high despite an easing of OPEC production curbs but won no immediate promise from major producer Norway to raise its own output.
Naimi told a news conference in Oslo after talks with Norwegian Oil and Energy Minister Olav Akselsen that he felt that OPEC producers had done their part to ease high prices with an agreement to hike output by 708,000 barrels a day.
12:21 06-23-00
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