Treasury Bonds Fall as Investors Await Further Signs of Economic
Slowdown
U.S. Bonds Fall as Traders Look for Signs of Slowdown (Update1) (Adds
swaps market information. Updates prices.)
New York, July 28 (Bloomberg) -- U.S. bonds fell for a third day as
investors were reluctant to buy without more signs of slowing economic
growth and tame inflation, which may show up in reports later this week.
''I'm not willing to commit any money to this market'' with yields where
they are, said Charles Ullerich, who helps manage about $2 billion at
Pilgrim America in Phoenix. He would consider buying if long-term
Treasury yields climbed to 5.80 percent.
The benchmark 30-year Treasury bond fell 1/2, or $5 per $1,000 bond, to
105 3/8 and its yield rose 3 basis points to 5.74 percent. The two-year
note's yield was unchanged at 5.46 percent.
Bonds briefly recovered when U.S. stocks slumped amid concern about
corporate earnings and the investigation of President Bill Clinton's
alleged involvement with a former White House intern. Treasury
securities slid again when stocks pared their losses.
The Dow Jones Industrial Average fell as much as 212 points, and ended
down 93.46, or about 1 percent, at 8934.78. ''The stock market started
to come back and our market goes down again,'' said Vincent Verterano,
head government bond trader at Nomura Securities International Inc.
A decline in the dollar also curbed demand for Treasuries. The U.S.
currency fell about 1.2 percent against the yen on reports that Kiichi
Miyazawa accepted Japan's top finance post, easing concern about delays
to economic reform there. The dollar fell to 141.29 yen, from 142.48
late yesterday.
Many bond investors are unwilling to make big bets before U.S. economic
reports later this week on second-quarter employment costs and gross
domestic product. ''The bond market will bounce around until we see some
signs of change in the economy,'' said Marshall Front, who oversees $1.3
billion in assets at Trees Front Associates in Chicago.
In today's main economic news, a private report showed that U.S.
consumers are a bit less upbeat about their finances than they were a
month ago. The Conference Board's consumer confidence index declined to
135.4 in July from a 30-year high of 138.2 in June, the New York-based
business research group said. 'Not So Rosy'
In two days of testimony to Congress last week, Federal Reserve Chairman
Alan Greenspan said he expects the U.S. economy to lose steam as Asia's
financial woes and the weeks-long strike by workers at General Motors
Corp. curb U.S. growth. Still, he also warned that inflation remains a
bigger threat to the economy than a protracted slowdown, and said the
central bank is ready to raise interest rates if necessary. ''Everything
is not going to be so rosy'' for the bond market in the second half of
the year, said Frank Rachwalski, who oversees about $16 billion of money
market assets at Scudder Kemper Investments in Chicago. ''My feeling is
the economy will do better.''
The Fed last increased interest rates in March 1997, when it raised the
target rate for overnight lending between banks a quarter point to 5.5
percent.
Thursday, the government will probably report that employment costs rose
0.8 percent after climbing 0.7 percent in the first quarter. Friday's
report on gross domestic product is likely to show that the economy
barely expanded in the second quarter, after growing at an annual pace
of 5.4 percent in the first three months of the year. 'Highlight' ''The
employment cost index will be the highlight of the week,'' said Bill
Gamba, head of private client group bond trading at SG Cowen.
Gamba and many others say they're bullish on bonds because they're
doubtful that Keizo Obuchi, who won an election Friday to succeed
Ryutaro Hashimoto as president of Japan's ruling Liberal Democratic
Party, will move quickly to boost consumer confidence. Obuchi is set to
become the next prime minister when parliament reconvenes Thursday.
Speculation that former Prime Minister Miyazawa will become Finance
Minister bred expectations that reform of Japan's economy might begin
sooner than expected. A senior official of the ruling Liberal Democratic
Party said Miyazawa, 78, will take the job, according to Kyodo News.
Miyazawa said earlier he was reluctant to accept because of his age.
The economic slump in Japan and other Asian economies prompted a rush to
the haven of U.S. bonds in recent months, pushing the yield on 30-year
bonds to a record low of 5.56 percent earlier this month.
Swap Markets
At today's yield of 5.49 percent, U.S. 10-year notes yield 392 basis
points more than the 1.57 percent yield on the No. 202 benchmark 10-year
Japanese bond. U.S. debt now yields 83 basis points more than the 4.66
percent yield on 10-year German bonds.
The benchmark five-year U.S. dollar swap spread narrowed 1 basis point
to 45 basis points. The spread is the difference between the yield on
the benchmark Treasury and the highest rate at which a ''AAA''-rated
corporation can sell its fixed-rate bonds, if it wants to do a swap that
leaves it paying no more than the London interbank offered rate.
Corporations often use interest-rate and currency swaps to guard against
changes in interest rates. The banks and securities firms that provide
these swaps often buy or sell U.S. Treasury securities to hedge against
a rise in interest rates.
About $69 billion in Treasuries traded through most of the major bond
brokers as of 3 p.m. Eastern time, according to GovPX, Inc., a bond
pricing service. Volume was about 29 percent below average for a Tuesday
in the past month, GovPX said.
Treasury Prices
The so-called basis, which reflects the difference between the current
30-year bond and the September futures contract, narrowed 11/32 to
281/32, or 8 25/32.
The three-month bill's discount rate rose 1 basis point to 4.93 percent,
a bond-equivalent yield of 5.05 percent. The six- month bill's discount
rate fell 1 basis point to 4.98 percent, a bond-equivalent yield of 5.18
percent.
The December Treasury bill contract was little changed, leaving its
yield steady at 4.96 percent, while the December Eurodollar contract's
yield was unchanged at 5.72 percent.
The gap between the two, the so-called TED spread, was unchanged at 76.
The TED spread is an indication of investor confidence in the U.S.
financial system.
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