Jim, how right you are>>Economic Data Crush Treasurys
Amid More Mortgage Hedging
By MICHAEL S. DERBY and JOY C. SHAW
DOW JONES NEWSWIRES
NEW YORK -- Optimism created by strong economic data crushed Treasury prices Thursday, the selling once again exacerbated by technically-driven mortgage market participants.
The price action came in a day of extraordinary volatility, with yields, which move inversely to prices, pushed to their highest levels in some time. Indeed, the selling in the 10-year note drove its yield to a level last seen exactly one year ago. Meanwhile, the ugliness was not endured by Treasurys alone: Swap spreads, mortgages and agency debt all got hammered as well.
In late trading, the 10-year Treasury note stood at 93 16/32, down 1 1/32 to yield 4.45%. The 30-year Treasury fell 2 3/32 to 99 23/32, yielding 5.40%.
The five-year price lost 12/32 to a 3.25% yield, while the three-year fell 10/32, yielding 2.21%, and the two-year price was down 9/32 to yield 1.78%.
After strong overnight trading, the catalyst for the blowout came after the surprisingly strong second-quarter gross domestic product data, along with the improving weekly jobless claims reports.
The selling then caught fire on hedging adjustments among mortgage securities holders, which has been at the root of much of the market's pain over recent weeks, traders said.
Long-dated securities were most beat up in the downtrade. But some in the market said the extent to which the two-year note yield had backed up was reflective of some market anticipation that better economic news could make the Federal Reserve move to lift interest rates at some point in coming months. Economists generally agree the Fed will keep monetary policy steady for the foreseeable future.
As for the technical part of Thursday's selling, mortgage securities holders and issuers are often forced to sell non-callable securities such as Treasurys when interest rates rise sharply in order to trim duration, or time to maturity in securities. Most strategists agreed that Treasury yield had moved through key technical levels, and that that inspired part of the selling.
The start of the New York trading day was mostly calm until the government released its economic data. The U.S. economy grew at a 2.4% annual rate in the second quarter, faster than the 1.4% pace recorded each of the previous two quarters. The second-quarter number was a full percentage point above Wall Street expectations. (See article)
The report represents a preliminary estimate on growth and the government will revise the data two more times as it incorporates information not yet available. The second quarter gain was fueled by government spending, but also derived support from a welcome increase in business investment, something policymakers have long argued is essential in building an enduring economic recovery.
Meanwhile, the Labor Department said the number of U.S. workers filing first-time applications for unemployment benefits declined for a third week in a row last week, dropping by 3,000 to a five-month low of 388,000 in the week that ended July 26. Market economists had expected a 14,000 increase in initial jobless claims.
The four-week average, which smoothes out weekly fluctuations, declined by 11,750 to 408,750, the lowest level in nearly five months.
Yet another blow came from a report on Chicago-area manufacturing, which itself showed unforeseen vigor, raising hopes that reports like the one due Friday from the Institute for Supply Management may also be better than estimates current see.
The scope of the negativity, which comes after the Treasurys have already suffered considerable hits over recent weeks, has been so strong that some strategists believe the market may have room to pause, even in the face of more good economic data.
That's critical, because Friday brings major tests from the ISM July manufacturing index and the Labor Department's July nonfarm payrolls report, the paramount data in the government's stable. |
