5:00 PM EDT :Treasuries rallied today as stocks retreated from yesterday's lofty levels. In late trading, the 10-Year Treasury Note was up by 18/32, lowering its yield to 4.95%; the Dow was down by 149.33 points to 149.33; and the Nasdaq was down by 32.44 points to 2,687.60.
Besides the flow from the stock market, bonds benefited throughout the week by traders seeking a safe haven because of increased concerns about mortage-related debt securities. Recent declines in indices of such debt and analyst downgrades, including another one today from Standard and Poor's, have intensified the shift to the less risky government debt arena.
This week's congressional testimony by Fed Chief Ben Bernanke added fuel to the fire as a considerable portion of his remarks were about the subprime mortgage situation. These loans have been under-performing and diluting the value of the securities backing them.
In the stock market, traders were suffering from a case of altitude sickness after recent gains. Several discouraging earnings releases helped trigger the sell-off. Oil prices edged lower today but remain near historical highs. The price of a barrel of light, sweet crude for August delivery fell by $0.28 on the New York Mercantile Exchange to settle at $75.79. The future expired today so Monday's front-month contract will be for September delivery.
By the end of stock trading, the Dow had lost 1.07%; the S&P 500, 1.22%; and the Nasdaq, 1.19%. And despite the fact that the Dow hit posted its first close above 14,000 yesterday, for the week, the index lost 56.17 points or 0.40%. The S&P 500 also posted a record close yesterday but, due to today's losses, finished the week down by 1.19%. And the Nasdaq posted its best close yesterday since early 2001 but ended the week down by 0.72%. Treasuries advanced on the week with the yield on the benchmark 10-Year Note losing 15 basis points (yield moves inversely to price). Moreover, today's closing yield level for the 10-Year Note was the lowest since June 4.
Next week's economic release schedule is relatively light but a heavy influx of supply will keep the bond market under pressure. 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.
There are no major economic releases slated for Monday or Tuesday. But on Tuesday, the Treasury will be selling an additional $6 billion amount of last January's 20-Year TIPS issue (the face value of the initial offering was $8 billion). TIPS stands for Treasury Inflation Protected Securities. These bonds differ from conventional Treasury securities in that although they have a fixed coupon (interest) rate, but their face value is regularly adjusted according to the Consumer Price Index, so the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted principal or the original face value is paid out.
Last July's reopening auction met with strong demand. Bids exceeded the $7 billion offer amount by 2.24 to 1, the best bid-to-cover ratio of all the 20-Year TIPS offerings (initial or reopening) since the security was first issued in July of 2004. Non-competitive bids, a gauge of individual investor demand, totaled $29 million, up from $21 million in the previous July's reopening but down from the $42 million in the initial issue (January 2006).
However, foreign demand was exceptionally strong. Indirect competitive bids, which include those from foreign central banks, accounted for 50.0% of all competitive bids and equaled 111.7% of the issue amount. Of the accepted competitive bids, the indirect bid category received 69.0%, and of the entire issue, it received 68.7%. This was the highest award percentage for the category in all of the 20-Year TIPS offerings to date.
Last January's initial issue met with decent demand. The bid-to-cover ratio for the $8 billion offering was 2.05, up from 1.48 in the previous January's $10 billion issue. Non-competitive bids were light at $25 million, but foreign demand was solid with indirect competitive bids receiving 58.7% of the issue. In January of 2006, the bid category received 55.6%.
On Wednesday, the report on existing home sales will be released. In May's report, the National Association of Realtors said the seasonally adjusted, annualized pace of existing home sales edged down by 0.3% to 5.99 million, the lowest rate since June of 2003.
The report said that inventories rose from 4.220 million to 4.431 million in May, representing an 8.9 month supply at the current sales pace. In April, the supply represented 8.4 month's worth of sales at the pace prevailing then. The median home price rose in May by $3,900 to $233,700 but this was 2.1% lower than May of 2006 when it was $228,500. The average price rose by $3,400 to $271,500 but this was 0.8% lower than the $273,700 average in May of 2006.
For June, another decline in the sales rate is expected. The consensus prediction is for a 1.5% drop to 5.900 million.
Also on Wednesday, the Treasury will be conducting its monthly auction of 2-Year Notes. Last month's auction was mildly successful. The bid-to-cover ratio was 2.80, up from May's 2.53 and above the average of 2.68 for the twelve such auctions preceding June's. Noncompetitive bids totaled $865 million, down from May's $938 million and below the twelve-month average of $894 million. Yet, as a percentage of the offer size, noncompetitive bids totaled 4.8%, a little higher than the 4.5% average of the previous twelve auctions, though down from May's 5.2%.
Foreign demand for the issue was tepid. Indirect competitive bids received 28.8% of all accepted competitive bids and 27.4% of the entire issue. This was up from May's award percentage of 21.7% but below the twelve-month average of 33.3%.
The last five, 2-year issues had a face value of $18 billion and that is the expected size of next week's offering.
On Wednesday afternoon, the Federal Reserve will release its latest edition of its Beige Book. The book is an anecdotal summary of economic conditions in the twelve Fed regions and the monetary policy committee uses it as one of its background resources during its policy deliberations. The next committee meeting is August 7.
Since other reports have already revealed the economic situation for the period covered in the summary, the Beige Book (named for the color of the hard copy cover) rarely has a forceful impact on the markets. However, a particular focus or tone within the report could have a bearing on what traders think the Fed is going to do so the release is always closely scrutinized.
On Thursday, the jobless claims report will be examined for insights on how the employment situation is developing. In yesterday's report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell by 8,000 last week to 301,000, the lowest reading in nine weeks. Analysts had been looking for a mild increase following a decline in the previous week that could have been distorted by the Independence Day holiday disruption. The four-week moving average, which smoothes out some short-term volatility, fell last week by 6,250 to 312,000, the lowest reading in six weeks. For the year to date, the average weekly reading has been 318,000.
But the report indicated that the level of continuing claims for the week ending July 7 (continuing claims must be at least a week old) rose by 20,000 to 2.571 million, the highest reading in three months. The four-week average rose by 13,500 to 2,542,250, the highest reading in four months. The weekly average for the year so far is 2,519,704.
Despite the rising trend in continuing jobless claims, the improvement in the initial claims category suggests that job growth remains healthy. The implication is bullish for the economy. For one thing, the increasing demand for labor indicates a vigorous business environment. Rising employment also points to more consumer spending. The downside for bonds is that greater economic activity increases the threat of inflation which will keep the Federal Reserve in a hawkish stance with regard to interest rates.
Also on Tuesday, the report on durable goods orders for last month will be released. Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Consequently, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.
In May's report, the Commerce Department said the seasonally adjusted level of the value of durable goods orders fell by 2.8%. Although this was trimmed to 2.4% in the subsequently released factory orders report, it was still the first decline in four months and was larger than analysts had predicted.
Declines in a number of key sub-categories indicated that the contraction was broad-based. Not only did the large but volatile category of transportation see a decline but even excluding the category, the value of orders fell. While defense orders rose in May, the category does reflect follow standard market forces. Excluding defense, orders fell and they also declined if transportation orders were excluded from the ex-defense category. Another important category is ex-defense capital goods minus aircraft, where the trend in orders provides some insight on core business demand. Here too, the data indicated a contraction.
For June, forecasters are looking for a modest rebound in durable goods orders of about 1.7%.
Later Thursday morning, the Commerce Department will release the report on new home sales for last month. May's report said the seasonally adjusted, annualized pace fell by 1.6% to 915,000. April's originally reported sales rate of 981,000 was revised down to 930,000 and the rates in February and March were also revised lower.
But not all of the news was bearish. May's rate was still the second highest since last December. In addition, the supply of homes on the market declined for a second month, though, due to the drop in the sales pace, May's inventory represented 7.1 months worth of sales, up from 7 months in April. Median home prices were up by $3,400 to $236,100 but were 0.9% lower than a year earlier. However, the average price of new homes was up by $13,400 to $313,000, which was 6.5% higher than in May of 2006.
For June, another decline in the sales pace is anticipated. The central-tendency predictions are for a 1.6% decline to a 900,000 rate.
The last Treasury auction of the week will be conducted on Thursday. The issue will be the 5-Year Note and the offering size is expected to be $13 billion, the same size as the last seven monthly issues. Last month's issue met with decent demand. The bid-to-cover ratio was 2.73, the highest since last September's auction. Noncompetitive bids totaled $187 million, the largest amount since last August. Foreign demand was relatively strong. Indirect competitive bids received 32.3% of the issue, up from May's award portion of 19.3% and a bit better than the average of 29.3% in the twelve auction's preceding last month's.
On Friday, the major release of the day is the first official accounting of gross domestic product (GDP) for the second quarter. GDP is the market value of all final goods and services produced by labor or property in the country in a year's time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. Friday's advance report will have been calculated with incomplete data so there will be another (preliminary) report in August and a final report in September.
The final report on first quarter GDP said the economy grew by 0.7% following a 2.5% increase in the fourth quarter of last year. For the April through June period, analysts predict that the economy rebounded by 3.2%. Increased business and government investment are cited as reasons for the assessment.
The last major release of the week is the final read on consumer sentiment for the month from the University of Michigan's twice-monthly surveys. The preliminary report, released last Friday, surprised observers with an overall sentiment index reading of 92.4, the highest since last January's 96.9. It followed June's final reading of 85.3. Analysts feel that the final index for July will reflect a little less optimism with a reading of about 91.0.
10:30 AM EDT :
Treasuries are getting a boost from a sharp decline in stocks this morning. Stock traders are taking back some of the recent gains that allowed the Dow to close at the 14,000 level yesterday. Aside from the technical pressures, a couple of earnings misses are adding to the current stock decline. Google's report after the bell yesterday fell short of analyst predictions and this morning's report from Caterpillar revealed an even larger disparity between the actual earnings and street expectations.
Another item that stock traders will be keeping their eyes on is the price of oil. In recent trading, the price of a barrel of light, sweet crude for next week delivery has been trading in a narrow channel near the $76.00 mark. The record closing high for a front-month contract is $77.03. High energy prices hurt the general economy by channeling business and consumer spending away from other areas.
There are no major economic releases slated for today so the inter-market influence is more pronounced. A possible obstacle for bonds may develop later in the day with traders taking a more defensive stance ahead of next week's heavy influx of supply. Besides the weekly bill auctions and the monthly 2- and 5-Year Note offerings, the Treasury will also be selling an additional amount of last January's 20-Year TIPS issue (Treasury Inflation Protected Securities)
