Treasuries Tripped Before Greenspan Talk
By Eric Burroughs
Tuesday July 16, 9:54 am Eastern Time
NEW YORK (Reuters) - U.S. Treasuries slipped on Tuesday as market players feared Federal Reserve Chairman Alan Greenspan would be optimistic in congressional testimony and data showed industrial production posted its sixth straight months of gains.
Treasuries had edged up early on the declines in stock futures, which were hit by market rumors of credit problems at a major U.S. bank. But those gains reversed as traders girded for the central bank chief's highly anticipated speech on the economy.
Greenspan will speak before the Senate Banking Committee at 10 a.m. (1400 GMT) and is expected to express bond-unfriendly optimism on the economy while at the same time warning about the threats to recovery. Analysts are eager to see how the Fed chief will address the stock market's recent plunge.
"The onus is on Greenspan to calm markets. The fear is that he won't be able to because there's nothing he can say to make these markets behave in a rational manner," said Astrid Adolfson, an economist at MCM Moneywatch.
Treasuries have staged a massive 3-1/2 month rally on the back of the steep slide in stocks that has sent the broad market down 20 percent. Benchmark 10-year note yields have fallen nearly a percentage point to stand just above eight-month lows at 4.64 percent.
With the economic outlook uncertain and financial markets unsettled, market players see little chance of the central bank moving to raise interest rates until early 2003.
"We expect (Greenspan) to hint that monetary policy will stay accommodative for as long as is necessary to ensure recovery," economists at UBS Warburg said in a research note.
On the economic front, the Fed reported that industrial production surged 0.8 percent in June, beating forecasts for a 0.5 percent rise. Capacity utilization rose sharply to 76.1 percent from 75.6 percent, a positive sign that factories are having to use more resources in boosting production.
STILL OBSESSED WITH STOCKS
While Greenspan will take center stage, Treasuries will also be paying close attention to the reaction in equities to the slew of second quarter earnings reports to be released this week.
Equity markets shrugged off some positive news from the likes of General Motors Corp. (NYSE:GM - News) and Nextel Communications (NasdaqNM:NXTL - News) to stumble at the opening bell.
Worried investors waiting for Greenspan's words pushed the Dow Jones industrial average (CBOT:^DJI - News) down 0.7 percent, while Nasdaq (NasdaqSC:^IXIC - News) edged up a fraction. That followed Monday's whirlwind session when the Dow swooned 440 points before recovering late to finish down only 45 points, or half a percent.
A rally in stocks on positive earnings would quickly hit Treasuries and send yields heading higher. Already many traders have doubted the bond market rally could have more room to run, only to see tanking stocks time and time again unleash a big rise in Treasury prices and a corresponding drop in yields.
Technical analysts said Treasuries were poised for further gains, with several upside objectives in September 10-year (TYU2) notes now in sight in the low 110-00 handle. Strong support at 108-30/32 and 108-25/32 should stem potential losses. In early trade, the contract fell 7.5/32 to 108-22.5/32 while September bond futures (USU2) shed 12/32 to 104-15/32.
December Eurodollar futures (EDZ2) fell 4 basis points to 97.935, down from contract highs of 98.035 hit on Monday but still implying little expectations of a Fed rate hike before year end.
At 9:35 a.m. (1335 GMT), the two-year note (US2YT=RR) was down 2/32 at 100-18/32. Its yield, which moves inversely to the price, rose to 2.59 percent from 2.55 percent on Monday. Five-year notes (US5YT=RR) fell 4/32 to 102-11/32, yielding 3.86 percent, up from 3.80.
Ten-year (US10YT=RR) notes were down 6/32 at 101-22/32, yielding 4.65 percent against 4.62 percent a day earlier. The 30-year bond (US30YT=RR) fell 14/32 to 99-13/32 to yield 5.41 percent, up from 5.38 percent. |
