US TSY MKT EXTEND LOSSES; TRENDLINE SUPPORT BREAKS IN MAR BOND
CHICAGO (MktNews) - U.S. Treasuries prices continued to weaken at midafternoon Wednesday with a break of trendline support in the Mar 30-year bond contract.
The market broke below an important daily bar chart trendline at 92 27/32, and sell-stop orders were expected to kick in and push the market still lower, floor traders said.
Earlier in the session, a well-known international hedge fund bullied prices lower as the fund reportedly sold a combined total of 5,000 Mar T-bonds through at least four different dealers.
"With that type of selling, the market is going to have a hard time trading up," he added.
In addition, dip-buyers that were expected around the 92 27/32 area in Mar T-bonds, just below the trendline, may have backed away as the market continues to trade extremely "heavy" he added.
For those still interested in buying Mar T-bonds on weakness, 92 08/32 may be the area of choice, as that was the post-Federal Reserve tightening low established on December 1, he added.
At 2:30 p.m. EST the U.S. Treasury will announce the details of its two-year note sale. Some players look for a slight give up in yield as demand to roll out of current two-year into the when-issued should be decent.
The concession in yield is possibly linked to year-end issues on the W/I and the anticipation of a reduction in supply. In addition, the Nov issue is a "double issue," with $28.3 billion outstanding, which implies a decent amount of interest to roll into the current issue.
The market was also looking for any clues to future monetary policy from Federal Reserve Governor Laurence Meyer's speech in Houston. However, the speech was not market moving and focused on banking regulatory policy.
Despite a bland speech by Meyer, February federal fund futures reflected approximately a 90% probability of a 25 basis point rate increase by the monetary policy board at i's Feb. 1-2 meeting.
Earlier the market focused on November industrial production data which came in as expected at up 0.3% and had little impact on price action. November capacity utilization was at 81.0%. October production was revised up to an increase of 0.8%.
At 2:05 p.m. EST Wednesday, the 30-year Treasury bond was trading at a yield of 6.322% vs. 6.293% at 8:20 a.m. Wednesday EST. --Alyce Andres, (312) 341-5936; email: aandres@marketnews.com.
TALK FROM TRENCHES: US TSYS CONTINUE TO ERODE; FED FEAR IS KEY
By Isobel Kennedy
NEW YORK (MktNews) - U.S. Treasuries continue to seep lower Wednesday. Only the five-year note has managed to eke out small gains on the day because the issue was very special in the repo market earlier in the session.
But generally speaking, flows are non-existent. Thin, illiquid trading conditions are the norm at this time of the year and Y2K concerns have only added to the problem this year.
One market pro who had been calling for a year-end rally has given up on that thought unless something extraordinary happens. "Y2K presents too great a risk for traders to stick their necks out so they are just sitting out the rest of the year," he says. In addition, since 1999 was one of the worst years for bonds in modern history, players just want it to be over. And he says, even if the market did offer value, "players can't see it because they have their eyes closed."
Looking ahead, this week will probably go out with a whimper after Thursday's trade data. A senior strategist says if Thursday's U.S. trade deficit is reported lower than the consensus of $24.2B, this will force gross domestic product estimates still higher toward 6% -- a level reached just four times in the past 15 years. Growth at 6% is within reach because forecasts are already clustering around 5 to 5-1/2% after the strong retail sales report.
One player says the Treasury market can ignore this data and "limp out" of 1999. But come 2000, the market will react to this data and the 2/30Y curve could invert. He says the Fed said 3.5% to 4% real GDP growth was the speed limit, but 5.5% to 6% is too much coming off 3Q growth at 5.5%. As a result, the Fed may put on the brakes hard, which would deal "a crushing blow to the two-year note," he says.
Next week, the FOMC meeting on Tuesday will be the key event. Players are divided about whether the Fed will move to a tightening bias. That will be followed by the sale of new two-year notes on Wednesday.
One seasoned salesperson says the outlook for the front end for the remainder of 1999 hinges on the Dec 21 FOMC meeting. If the Fed moves to a tightening bias, the new two-year note will likely be auctioned at a 6.10%. That level should represent the high yield for the year. 6.079%, the most recent 1999 high yield, was hit on Tuesday after retail sales. But if the Fed maintains a neutral policy, the salesman says it would fuel a year-end rally with the two-year trading up to a 5.90% by Dec 31.
Wednesday afternoon, the size of the two-year note will be announced and there has been lots of chatter about the opening rolls. In the latest talk, some players are looking for a slight give up in yield saying that demand to move into the new note should be decent because the November 2Y note is a double issue with $28.3B outstanding. In addition, it is a year-end issue and the Treasury is expected to reduce 2Y supply in the future.
Others, however, are expecting a pick up in yield, citing the Dec 31 settlement date and Y2K fears as major deterrents. Concerns still lingers that "nobody will show up for the auction." However, these players also expect the roll to tighten up in January due to shrinking supply and the absence of the Y2K hurdle.
On Tuesday, the Labor Department consumer price index report showed gasoline declining 0.6%, and that was the result of a shortened survey period that failed to capture the months' actual 1% increase as recorded by the Department of Energy, senior BLS analyst Patrick Jackman told Market News International.
And now some economists are worried that the December CPI will trigger a big jump in gasoline because it will finally capture the November increase on top of any gains recorded in December.
But even if this happens, should the market be alarmed? According to Wednesday's Wall Street Journal, it shouldn't if you subscribe to the New Economy viewpoint. The front page story says inflation may not be going higher even with an oil price jump. The article says oil is less important to the U.S. economy because it is more oriented towards service than manufacturing. In addition, sophisticated markets and computer models in the new economy tell producers where to get cheaper energy and how to hedge future price rises. And he Internet and new kinds of services are making energy less relevant.
The entire article is well worth reading. It is filled with amazing bits of information like this: In 1981, jet fuel accounted for almost 30% of airlines' operating expenses. Energy saving technology have reduced that to only 10% today; Advances in technology allow steelmakers to merely flick a switch that shifts the fuel they use from oil to natural gas. A computer tells them when it is time to make the change!
It is also interesting to note that the article was co-written by one of the Journal's top staff reporters in Washington. Is it coincidental that this same reporter wrote Monday's article about the Fed's procedures for disclosing monetary policy in the future?
There is lots of talk about Y2K and what could happen. Some, like Dallas Fed President McTeer, are pooh-poohing any serious results. In fact he said he was just going to buy an extra six pack of beer in order to prepare!
Others, however, are building shelters, stockpiling money, food and medical supplies. Some are even storing gold ingots in their attics.
But ironically, the biggest threat from Y2K may come from the proverbial "man next door," not a terrorist bomb or a nuclear explosion. Just this week, Associated Press reported that a Michigan man "who was stockpiling food and fuel to prepare for possible Y2K problems escaped serious injury when some of the propane gas he was storing in his basement exploded." Luckily, he only suffered singed hair and a burn on his cheek but the blast pushed out sections of his home's cement-block foundation and bowed walls. One of the 120-pound tanks he was storing leaked and caught fire. Of course it doesn't take much imagination to see how an innocent event like this -- especially if it occurs right at the height of Y2K anxiety -- could trigger dangerous hysteria. --Rob Ramos and Joe Plocek contributed.
NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury trading rooms offered as a gauge of the mood in the financial markets. It is not hard, verified news. |
