Mike, good read on the 30 year bond:
money.net
By Ross Finley
NEW YORK - U.S. 30-year Treasury bonds rallied on Wednesday in their biggest-ever one-day price gain after the Treasury said it was scrapping new issuance, triggering a mad rush by investors to snap up the securities.
Getting rid of the 30-year bond means the end of what was once considered the safest financial instrument in the world. The bond was first regularly issued in 1977 and an estimated $565 billion worth is in private investors' hands.
"Usually the Treasury gives us a little bit more notice. This was obviously a huge surprise,'' said Steven Saslow, proprietary trader at HSBC Securities in New York, as bond prices soared more than 5 full points.
The shrinking size of bond issuance in recent years has reduced the long bond's standing, making it harder to trade and less useful as a pricing benchmark for other types of debt.
Wednesday's dizzying rally, which saw the biggest drop in bond yields since the 1987 stock market crash, was infectious, lifting most of the Treasury market with it. Yields on benchmark 10-year notes flew up more than a full point and five-year notes also caught a strong bid in a mad swoop that one market strategist described as "insane.''
U.S. Treasury Secretary Paul O'Neill said the government's decision was not really driven by a desire to bring down long-term interest rates and thus help stimulate economic growth, but it is an added bonus.
"If that was a collateral benefit, then we are willing to accept it,'' said O'Neill, in an interview on cable news television CNBC.
Strategists said the move was exaggerated by the unwinding of massive market positions that traders had taken to bet on the outperformance of interest-rate-sensitive two-year notes versus bonds. This play, in vogue for most of the year, bet on aggressive rate cutting by the Federal Reserve and an eventual economic turnaround.
Indeed, by the end of the session, some players were putting those bets back on, seeing the bond gains as too heavy, given the likelihood of more economic weakness and further Fed rate cuts.
Thirty-year Treasury yields -- which have fallen little as the Fed has slashed interest rates nine times this year -- crashed 33 basis points to their lowest rates since October 1998.
The tumble in bond yields spread to 10-year notes, helping longer-term borrowing rates tumble. That may help the economy climb from its year-long slump, prompting some to suggest the Treasury was giving the Fed a helping hand.
"I can't remember the last time we had a five-point rally'' in the bond, said Jim Claire, director of fixed-income trading at Evergreen Institutional Investments in Charlotte, North Carolina. He said the bond rally reminded him of the 1987 stock market crash.
The demise of the 30-year bond means existing securities will gain scarcity value over time as bonds are gradually removed from the market, either via the government buyback program or expiration. The bonds, issued as recently as last Aug. 9, are also used as an interest-rate hedging tool for institutional investors.
At 5 p.m. EST(2000 GMT), 30-year bonds (US30YT-RR) were up5-7/32 at 107-25/32, yielding 4.87 percent. Benchmark 10-year notes (US10YT-RR) jumped 1-13/32 to 106 even, yielding 4.24 percent -- a three-year low.
Two-year notes (US2YT-RR) added 5/32 to 100-23/32, yielding 2.37 percent -- the lowest ever, while five-year notes (US5YT-RR) rose 15/32 to 104-25/32, yielding 3.47 percent -- nearly a four-decade low.
Before the Treasury Department's shock decision, two-year notes had been knocked down briefly by a government report that showed the economy contracted by 0.4 percent in the third quarter, far less than the 1.0 percent analysts had expected.
But investors said the GDP data had not altered market expectations of bond-supportive weak economic data this week, including an expected dismal report on the U.S. employment situation on Friday. That cushioned losses in shorter-dated Treasuries, which are interest-rate sensitive.
"Fundamentally, the economic picture hasn't changed,'' said James Caron, fixed-income strategist at Merrill Lynch. "Things still look very bleak and we're expecting weak economic data going forward.''
NO MORE BONDS
In its quarterly refunding announcement, the Treasury said it would sell no more 30-year nominal or inflation-indexed bonds, taking the market by surprise. The sharp rally in bonds narrowed the gap between yields on two-year notes and bonds to 244 basis points, the narrowest since Sept. 13, the day bond markets reopened after the Sept. 11 attacks.
"We do not need the 30-year bond to meet the government's current financing needs, nor those that we expect to face in the coming years,'' Peter Fisher, the U.S. Treasury's Under Secretary for Domestic Finance, told reporters at the department's quarterly press conference to lay out details of note auctions next week.
Fisher also said the Treasury intends to sell $16 billion of five-year notes on Nov. 6, as well as $7 billion of 9-3/4-year notes on Nov. 7. These last issues are an additional issuance, or "reopening,'' of 10-year notes first sold in August.
Fisher said the government's debt-buyback program, initiated early last year when budget surpluses were predicted into the indefinite future, will now proceed only on a ''quarter-to-quarter'' basis.
Future buyback amounts, if any, will be decided in light of the government's fiscal projections and will be announced quarterly, he said. The program has already taken $57.5 billion in face value of older bonds out of the market.
The National Association of Purchasing Management-Chicago said its October index slipped to 46.2 from 46.6 in September, beating estimates of a 43.0 reading. But that report was mostly overlooked by bond investors. |
