Here Is An Article About The Treasuries and The Rate Cut Assumption
It should be very interesting. Since I don't think the Fed is going to announce that there will not be an interim cut I wonder when and how the market concludes something is not going to happen.
US Credit Review: Treasuries Rise, Rate Cut Seen This Week
Futures World News - February 26, 2001 17:14
By Rafael Nam and Eric Avidon, BridgeNews
New York--Feb. 26--Treasuries rallied Monday on mounting expectations
that the Federal Reserve would cut rates this week. Short coupons
continued outperforming longer-term Treasuries, steepening the yield curve
to 99.6 basis points from 94 basis points late Friday.
* * *
Several factors led to a sharpening of the expectations for a rate cut
this week, including news that Federal Reserve Chairman Alan Greenspan
would modify a speech he gave Feb. 13 to a Senate committee before
presenting testimony to a House committee Wednesday.
Greenspan typically delivers virtually the same semi-annual address on
monetary policy to both committees.
A Fed spokesman said Greenspan's speech would be "modified slightly,"
a comment which buoyed Treasuries prices as participants took the news as
a suggestion the Fed might be poised to cut rates imminently.
"As soon as people saw those Greenspan headlines, they started to
think that it could be because the Fed is cutting rates and Greenspan
needs to explain," said a trader.
Following news of possible changes in Greenspan's speech, investment
house Bear Sterns increased the odds of a 50-basis-point interest rate cut
to 80% from 60%, which only served to fuel the rally.
"We have been told that Greenspan is going to change his speech," said
Bear Stearns economist John Ryding. "He can't stay with the same testimony
when consumer confidence has become so weak." (Story .18806)
In his testimony on monetary policy before a Senate committee earlier
this month, Greenspan suggested that current weakness in the U.S. economy
would dissipate and said he saw a low probability of a prolonged
recession.
But participants pointed to last week's 7% slide in the Nasdaq and the
University of Michigan's early February sentiment reading as evidence
consumer confidence has further deteriorated since Greenspan spoke.
"The general sentiment is that the economy is facing a lot of
pressures, in particular, in business and consumer confidence," said
Michael Cheah, a vice president and portfolio manager at SunAmerica Asset
Management.
According to some participants, all it will take now for the Fed to
actually ease will be a weak February consumer confidence report on
Tuesday.
"A lot depends on the consumer confidence tomorrow," Cheah said. "If
we get another drop, which is quite likely, the Fed will go by 50 basis
points (Tuesday)."
According to a survey of analysts conducted by BridgeNews, consensus
is for a decline to 110.3, from 114.4 in January.
Sung Won Sohn, chief economist at Wells Fargo warns that the market
should "brace for a significant setback" in confidence.
"All the indications are that of more layoff announcements and more
talk of a recession," he said. "These things are going to hurt consumer
confidence."
However, Sohn noted that he is not among the camp who believes the
Federal Reserve will intervene this week.
"It's wishful thinking," he said. "The Fed doesn't want to give an
appearance of panic. If they were to cut rates, it would probably make the
situation worse not better. We are more likely to see a 50-basis points
ease in March 20."
In addition, Sohn said he does not believe the recent weakness in the
equities market will be a reason for the Fed to intervene, as some
participants X have argued.
"Certainly, in Wall Street, people think that Greenspan should run
monetary policy to bail out the stock market," he said. "But that's only
one part of the equation."
"The stocks market and manufacturing sectors are doing poorly," Sohn
added.
"But the rest of the economy is doing quite well. And the service sector
going up quite nicely."
He thinks "Treasuries are overpriced, based in a recession, and
aggressive cuts from the Fed. Neither may materialize."
On the other hand, Cheah believes that the market is correctly priced.
"To get to at least neutral bias, fed funds should be about 4%," he
said, adding that's a point which he expects the Fed to reach by the
middle of the year.
With expectations for an early rate cut at a fever pitch, the
two-/30-year steepened to 99.6 basis points from 94 basis points late
Friday afternoon.
However, Cheah said the steepening may have run its course for the
time being, noting that those who have done steepening trades have "done
very well." He said it was time to "take your profit and run."
At 1600 ET, the two-year note was up 5/32 at 100 10/32, yielding
4.443%, while the 30-year bond was up 18/32 at 98 30/32, yielding 5.439%.
Meanwhile, the 10-year note was up 15/32, at 99 20/32, yielding 5.032%.
Participants said a weaker-than-expected home sales report sparked
Treasuries initial gains this morning, after most coupons opened slightly
lower.
Sales of existing single-family homes in January fell an unexpected
6.6%, dropping to a seasonally adjusted annual rate of 4.650 million
units, well below the 5.00 million units rate analysts had forecast.
(Story .402)
"Home sales is just a result of consumer confidence," said Sohn said.
"It's not interest rates, and it's not the economy. It's just fear of
unknowns that's leading to setbacks."
The soft economic data, combined with a sluggish opening in the
equities market, gave a bid to the Treasuries mid-morning.
Equities did post gains Monday, with the Nasdaq closing up 2%, or 45
points, and the Dow Jones industrial average up 200 points, or 1.92%.
But Treasuries brushed aside the gains as sentiment regarding the
likelihood for near-term Fed easing outweighted and as the equities gains
were seen as not enough to make up for stocks recent downturn.
With the Fed foremost on participants minds, the only official
guidance of any sort came late in the day from Dallas Fed President Robert
McTeer who said that the Fed could cut interest rates further if
necessary, but that it prefers to set monetary policy at its regular
meetings.
McTeer said it's questionable whether the economy has hit bottom yet.
But he also noted that while there is the potential for further stock
market declines, the Fed should not base monetary policy on stock market
movement.
Earlier, former Federal Reserve Governor Lyle Gramley said he sees
only a 20% chance the Fed will cut interest rates before the next
scheduled policy meeting March 20. Stronger-than-expected January economic
data and recent higher-than-expected inflation figures make a rate cut
before the March 20 meeting unlikely, he said. (Story .16975)
With Treasuries focused on the Fed, commentary by officials including
Treasury Secretary Paul O'Neill and White House economic adviser Lawrence
Lindsey had little impact on trading Monday. |
