Bonds Recoil as Economic Outlook Brightens
U.S. government bond prices retreated Tuesday as a rebound in durable goods orders contrasted with weakness in other parts of the economy, complicating the Federal Reserve's interest rate-slashing campaign.
An auction of five-year government debt added selling pressure to a bond market already in profit-taking mode after a nearly non-stop rally since the middle of last year.
The $14 billion sale attracted below-average demand overall. Appetite was also restrained among the large institutional investors and foreign central banks, the so-called indirect bidders, that traders monitor closely.
"The market was trading much lower into the auction, and has since extended that trend post-auction -- in line with the modest indirect interest," said Ian Lyngen, interest rate strategist at RBS Greenwich Capital in Greenwich, Conn.
Five-year notes were down 15/32 in price, which pushed the yield up to 2.89 percent. Benchmark 10-year notes were down 25/32 on the day, which lifted the yield to 3.68 percent from 3.58 percent late on Monday.
The jump in December durable goods ordersfollowed several months of retrenchment, providing ammunition for those who believe the economy will skirt recession just as officials at the Federal Reserve begin a two-day policy meeting.
Bonds extended losses after consumer confidence for January was slightly above forecasts and was accompanied by upward revisions to the prior month.
Analysts reasoned the Fed would be reluctant to disappoint market expectations for another aggressive rate cut Wednesday following an emergency, half-percentage-point move last week that brought the federal funds target to 3.50 percent.
"The durable goods report suggests that the economy is probably in better shape than a lot of people thought, although it is only one month," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.
"Certainly, it is not going to prevent the Fed from cutting rates tomorrow," Brown said. The Fed's policy-making Federal Open Market Committee begins meeting on Tuesday.
The upward momentum in stocks, disrupted only briefly by a market rumor that JPMorgan Chase could be hit by a big derivatives loss, reinforced a tendency toward profit-taking in bonds from lofty peaks. People familiar with the matter said the rumor was not true, and JPMorgan declined to comment.
One Fed caveat is the Societe Generale trading scandal. A trader at the French bank was accused of hiding huge losses and is believed to have partly triggered the global stock sell-off that seemed to drive the U.S. central bank's emergency cut.
In this context, the Fed could opt for a more modest rate cut to avoid looking like it is bailing out wayward investors.
Still, the consensus was for a more aggressive half-percentage-point move, if only as an effort to get ahead of market sentiment.