ANYONE NOTICE CRAMERS BOTCHED CALL ON THE 10 YEAR BOND?
U.S. Treasuries Gain After Report Shows Retail Sales Dropped
New York, May 14 (Bloomberg) -- U.S. Treasuries surged, driving benchmark 10-year note yields to a 45-year low, after a government report showed retail sales fell in April.
The gains, the seventh in eight days for the 10-year note, trimmed its yield to 3.52 percent, the lowest for a government bond with 10 years to maturity since 1958. The yield gap between two- and 10-year notes narrowed to its smallest since November amid signs inflation may slow as the economy slumps.
Federal Reserve policy makers are ``more likely to lower interest rates'' after the report, making today's yields on notes attractive, said Paul Calvetti, head of Treasury bond trading at Deutsche Bank Securities Inc., one of 22 firms that trade with the Fed.
The 3 5/8 percent note due May 2013 gained 5/8, or $6.25 per $1,000 face amount, to 100 25/32 at 2:10 p.m. in New York, according to Deutsche Bank.
Yields on interest-rate futures fell as traders stepped up bets that the Fed will lower the 1.25 percent overnight interbank rate, known as federal funds, as soon as next month. Yields on June Eurodollar futures, a three-month lending rate that has exceeded the overnight rate by an average of 23 basis points over the past 10 years, fell 1 basis point to 1.225 percent. A basis point is 0.01 percentage point.
Today's report ``points towards more economic weakness, and with more economic weakness you're looking at not much inflation going forward,'' said Kevin McNair, who manages about $4 billion of bonds at BB&T Asset Management Inc. in Raleigh, North Carolina.
Yield Gap
The 1 5/8 percent note due 2005 rose 1/16 to 100 13/32 after the government said retail sales fell 0.1 percent in April. The decline in sales was a surprise as the median forecast in a Bloomberg News survey was for a 0.4 percent rise.
Excluding automobiles, sales dropped 0.9 percent, the biggest decline since the September 2001 terrorist attacks.
The 10-year note's yield has shed 32 basis points since May 5, the day before Fed policy makers said they were concerned about the potential for ``an unwelcome substantial fall in inflation,'' which may deepen the economic slump.
Over the same period, the yield gap between the 10- and two- year notes has shrunk to 2.13 percentage points from 2.35. Investor confidence that the Fed won't raise overnight rates while it is concerned about slowing inflation has stoked demand for the longer-maturity issues, whose yields remain high relative to shorter-term debt by historical standards.
`On Hold'
The yield gap between 10- and two-year notes, for example, has averaged 78 basis points over the last 10 years.
Meanwhile, yields on notes with shorter maturities offer little more than overnight rates by historical standards. The two- year note's yield exceeds the overnight rate by 16 basis points, compared to an average gap of 50 basis points over the last 10 years.
``The Fed has pretty much told the fixed-income markets they're on hold for a prolonged period of time,'' said Patrick Maldari, who helps manage $5.5 billion of bonds at Merrill Lynch Investment Managers in Princeton, New Jersey. ``They're forcing investors out on the yield curve.''
Maldari's funds hold more Treasuries maturing in five to 10 years than their benchmark, he said.
Ten-year notes also have benefited from speculation the Fed will buy them to lower their yields, helping boost economic growth, as the overnight rate approaches zero.
``The Fed now has very limited policy options at the short end'' of the Treasury spectrum, said Michael Ryan, chief fixed- income strategist at UBS PaineWebber Inc.
Fed's McTeer
Dallas Federal Reserve Bank President Robert McTeer said in a speech yesterday that the central bank could buy longer-maturity securities to help boost growth and counter deflation, a step that ``might help.'' He indicated a move isn't imminent, saying, ``Please don't think the Fed is on the verge'' of trying it.
The 30-year Treasury bond's yield fell to a record low following a report that the Treasury official who made the decision to stop issuing 30-year debt will remain in his job. Peter Fisher, Treasury undersecretary for domestic finance, withdrew from consideration for the presidency of the Federal Reserve Bank of New York, which William McDonough plans to vacate next month. The yield of the 5 3/8 percent bond maturing in February 2031 fell to 4.5 percent as its price rose 1 15/16 to 113 25/32.
Treasuries also benefited from a decline in stocks, which boosted the appeal of fixed-rate investments. The Standard & Poor's 500 Index fell for a second day after reaching an eight-month high on Monday.
Gains in Treasuries were limited as some investors balked at buying the securities at such low yields.
Inflation
``The search for yield is hindering any type of Treasury market rally you could possibly see,'' BB&T's McNair said. His funds hold fewer Treasuries and more corporate and mortgage-backed bonds than their benchmarks recommend, he said.
``You can't pull a lot out of corporates and mortgages right now because of the fact that you've got to have carry,'' McNair said, referring to the yield advantage those securities offer over Treasuries.
Government reports on inflation to be released tomorrow and Friday are expected to show prices declined in April, which may create additional demand for Treasuries. A report on wholesale prices to be released tomorrow will show they fell 0.7 percent in April after rising 1.5 percent in March, according to the median forecast.
Prices paid by consumers likely declined 0.1 percent in April after rising 0.3 percent in March, a report due out Friday will show, economists said.
Last Updated: May 14, 2003 14:16 EDT |
