You know sometimes it makes sense to listen to Easy <grin>. I think he thought this might prop the USD some?
Greenspan Rate Warning Spooks Treasuries
Friday November 19, 11:29 AM EST
By Wayne Cole
NEW YORK (Reuters) - U.S. Treasuries prices skidded lower on Friday after Federal Reserve Chairman Alan Greenspan said investors should be hedged for higher interest rates.
The benchmark 10-year note shed 20/32, lifting yields to 4.19 percent from 4.12 percent, while short-term yields hit their highest levels in five months. Treasury prices move in the opposite direction of yields.
Speaking at a euro conference in Frankfurt, the Fed chief said rising rates had been advertised for so long that anyone who had not hedged by now was "desirous of losing money."
The market took that as a warning of more rate hikes to come and Treasuries sold off. Some analysts thought the move an overreaction given investors have already priced in a hike for December <0#FF:> and another by March.
Others thought the pullback was more an unwinding of unreasonable gains made earlier in the week.
"The market had risen because of specific one-off flows, like the switch from bunds to Treasuries," said David Ader, an interest rates strategist at RBS Greenwich Capital, referring to an unwinding of long bund/short Treasury positions.
"But those were temporary factors and now they are out the way, fundamentals are reasserting themselves," he said, noting the week's economic data "certainly wasn't bond friendly."
Traders also reported talk a well-known bond fund and a European hedge fund were now reestablishing long bund/short Treasury positions which had proved very profitable in recent weeks.
Two-year notes slid 6/32 in price, taking yields to a five-month high of 2.95 percent from 2.86 percent late Thursday. The five-year note lost 12/32, lifting yields to 3.56 percent from 3.48 percent.
The 30-year bond lost 26/32, taking yields to 4.86 percent from 4.81 percent.
Treasuries had initially rallied when the dollar sank to four-year lows against the yen after Greenspan said the U.S. trade deficit could not increase forever without meeting resistance from foreign investors.
Greenspan never specifically mentioned the dollar, instead recommending a cut in the U.S. budget deficit. But dealers were all too aware that, politically, an easier way to correct the trade shortfall was through a weaker currency.
"The market's reading between the lines and sees a weaker dollar written there," said one trader at a US. primary dealer. "Now, normally that would be bad for bonds, but in this case everyone's betting the Asian central banks will have to buy dollars and stay captive customers for Treasuries."
In particular, bulls hope the Bank of Japan will intervene to restrain the yen and then funnel any dollars bought into Treasuries. Foreign central banks have already bought a net $204 billion of Treasuries this year.
The dollar is likely to be a hot topic at the Group of 20 meeting this weekend and dealers doubt there will be any agreement on controlling currencies.
Still, so far, intervention has been more a rumor than a fact and that kept a lid on the bond market.
"Traders realize that without anticipation of heavy central bank buying the bond market doesn't really belong here," said Josh Stiles, senior bond strategist at IDEA Global. "So, it's kind of on thin ice and will be subject to the reality of central bank buying -- or rumors of buying -- near term."
The pullback comes at the end of a perplexing week for many traders, and a frustrating one for bears. Stronger economic data, a drop in oil and a rally in stocks would typically have trashed fixed-income debt.
But after testing and failing to break a major chart barrier for the 10 year note at 4.28 percent, yields have fallen relentlessly catching many speculators in a vicious short squeeze. |
