Monday, 5:00 PM EDT, June 25, 2007 :Treasuries maintained altitude today, gaining support late in the session from a dramatic reversal in the stock market that left the indices in the red after having been solidly ahead earlier in the day. In late trading, the 10-Year Treasury Note was up by 14/32, lowering its yield to 5.08%; the Dow was down by 8.21 points to 13,352.05; and the Nasdaq was down by 11.88 points to 2,577.08.
The economic news of the day was bond-friendly. The pace of existing home sales slipped in May for a third consecutive month to its lowest level in four years and inventories of homes on the market were at a 15-year high. But the sales pace was little changed from April. Nonetheless, the news suggests less pressure on the Fed to adopt a more hawkish stance on rates and with the Fed policy meeting looming, bonds were able to advance.
Some commentators cite this rate implication as one of the reasons stocks made progress in the first part of their session. Bargain hunting following last week's losses also gave stocks an initial push. By about 12:30 PM Eastern Time, the Dow was up by 128.51 points or 0.96%, the Nasdaq by 0.65%, and the S&P 500 by 0.78%.
But the rally lost momentum and by about 3:00 o'clock the indices hit their lows with the Dow down by 0.44%, the S&P 500 by 0.66%, and the Nasdaq by 0.79%. They were able to pare their worst losses but still finished in negative territory. The Dow was down by 0.06%, the S&P 500 by 0.32%, and the Nasdaq by 0.46%.
Tomorrow's major news releases are the report on new home sales and the Consumer Confidence Index. Following a sharp jump in the sales pace (seasonally adjusted, annualized) in April, analysts expect a retreat in May's figure. From a 981,000 rate, they are looking for a decline to 925,000. This would be the biggest monthly decline since January but the rate would still be the second highest since last December.
The confidence index for the month is expected to reflect a deterioration of optimism relative to May. May's index reading was 108.0, up from 106.3 in April. A reading of about 106.0 is predicted for June.
Aside from the economic data, traders will be bracing for new supply in the form of the monthly 2-Year Note offering. The offer amount is $18 billion and the deadline for competitive bids is 1:00 PM Eastern Time. Traders avoid buying the soon-to-be off-the-run issue in favor of the more liquid new issue. Traders who will be bidding usually refrain from aggressive buying before the auction in order to keep yield levels high (bids are for yield and bidders want the highest they can get). And many traders keep to the sidelines prior to auctions until the success of the sale is known.
Compounding the uncertainties related to the auction (and Wednesday's sale of 5-Year Notes) is this week's Fed meeting. It begins on Wednesday and concludes on Thursday. As the conclusion of the meeting draws near, traders in both markets will likely take defensive positions.
