U.S. Treasury Prices Rise
September 22, 2004
By Ros Krasny
CHICAGO (Reuters) - U.S. Treasury prices rose
strongly on Wednesday in response to rising oil prices, weak
equities and lower inflation prospects.
Yields on the benchmark 10-year note (US10YT-RR),
which move inversely to prices, moved below 4.0 percent for
the first time in five months.
Sliding U.S. stock prices boosted Treasuries
on a day when some strategists had expected the opposite.
The blue chip Dow Jones industrial average
fell 1.3 percent to its lowest in more than three weeks, and
technology stocks suffered deeper losses.
A surge in NYMEX crude oil futures (CLc1)
above $48.50 per barrel to within sight of record highs also
fueled Treasuries buying. The latest oil price spike suggested
gas prices at the pump could climb again after a few weeks'
High energy prices act like a tax on consumers,
cutting into disposable income, and could crimp hiring and capital
investment if business confidence is bruised.
"Investors are wondering: 'Is the rise in
oil prices going to curtail consumer spending?' Is it going
to hold businessmen back from hiring?"' said Josh Stiles, senior
bond strategist at IDEAglobal.
Sluggish sales at major chain stores have
been blamed partly on high gasoline prices, and demand for big-ticket
items such as autos has also suffered.
General Motors Corp. (GM), the largest U.S.
automaker, will hold a three-day sale with interest-free loans
of up to six years to clear bulging inventories. "This suggests
the soft patch is not over yet," said David Sloan, senior economist
at 4CAST Ltd.
On Wednesday, American Airlines raised fares
for most trips in North America to help offset the high cost
of jet fuel. American, the world's largest carrier, said high
jet fuel costs would add more than $1 billion to its expenses
over the coming year.
A report on August durable goods orders on
Friday will give a reading on how the economy is faring after
a wobbly summer. Wall Street forecasts orders to be flat compared
Initial strength in bonds followed the Federal
Reserve's comment after its policy meeting on Tuesday that inflation
expectations "have eased in recent months."
The comment was taken by dealers as a license
to buy, even with bond prices already high.
Gains were exaggerated by short-covering from
firms caught flat-footed by recent strength.
Falling inflation prospects and the recent
string of Fed rate hikes have helped narrow the spread between
10-year and two-year note yields to 153 basis points, a three-year
Speculators also bought on ideas that mortgage-related
"convexity buying" could be triggered if the 10-year yield
falls toward 3.90 percent. Dealers have seen little of the anticipated
mortgage sector buying so far.
Figures from the Mortgage Bankers Association
early on Wednesday showed new refinancing applications up for
a third straight week, climbing 4.1 percent.
Brokers expect rapid mortgage prepayments
if yields fall further. Adjustable-rate mortgages taken out
earlier this year could be shifted to fixed-rate loans. The
average 30-year mortgage rate is at the lowest since March.
The 10-year Treasury note rose 15/32 for a
yield of 3.98 percent, down from 4.04 percent late Tuesday.
Yields are at a major retracement point from the June 2003 low
to the June 2004 high.
The 30-year bond (US30YT-RR) jumped 1-2/32,
yielding 4.77 percent, down from 4.84 percent. Five-year notes
(US5YT-RR) were up 5/32 to yield 3.25 percent, against 3.28
percent. Two-year notes (US2YT-RR) were steady at a yield of