AP News, September 13th, 2007
An unexpectedly boisterous stock market rally put Treasury prices under pressure Thursday, as conviction mounted that the Fed will cut rates next week.
The stock market has had an unusually strong influence on Treasurys this month and its advances generally indicate increased tolerance for risk and diminished demand for government-backed bonds.
Although Fed officials in recent speeches cited the strengths of the economy and have not hinted at a looming rate reduction, Treasury prices indicate investors are expecting a quarter point or half point rate cut.
Certainty about a rate cut took hold last week after the Labor Department reported that the economy gave up 4,000 jobs in August. Investors also point out the housing sector remains weak.
The main debate among investors this week is whether the Fed will cut rates by a quarter percentage point or a half point. Earlier in the week, Treasurys benefited from speculation that the reduction would likely be a full half point, but new speculation that the bank will opt for the smaller cut contributed to Thursday's losses, analysts said.
RBC Capital Markets projects that the Fed will cut rates by 50 basis points on Tuesday. The institution notes, however, that recent actions to boost liquidity by the Fed and other central banks mean that a quarter point reduction also is possible, according to T.J. Marta, a fixed-income analyst at RBC.
The benchmark 10-year Treasury note was down 19/32 at 102 2/32 with a yield of 4.49 percent, up from 4.41 percent at Wednesday's close. Prices and yields move in opposite directions.
The 30-year long bond fell 1 1/32 to 103 29/32 with a yield of 4.75 percent, up from 4.69 percent on Wednesday.
And the 2-year note was 6/32 lower at 99 28/32 with a 4.05 percent yield, up from 3.93 percent on Wednesday.
Initial state compensation claims for workers who lost their jobs rose 4,000 to 319,000 in the latest week, the Labor Department reported Thursday. It also revised upward the prior week's data to show a 22,000 decline in claims.
The discrepancy between the August employment report showing unexpected jobs losses and the weekly claims tallies, which generally showed low levels of jobs cuts this summer, has puzzled economists. Generally weak jobs growth is accompanied by heavy layoff levels, yet this summer's reports have not shown especially large numbers of job cuts.
"There are a lot of moving parts here and the labor market is hard to explain," Marta said. "But the bottom line here is that we are not adding jobs at a rate that is sufficient to absorb all the new entrants into the work force. That level is thought to be 100,000 to 130,000 new jobs per month."
This puzzle could add to the Fed's sense of caution next week and fuel an argument either to put in place a smaller quarter percentage point reduction or leave the overnight Federal funds rate at 5.25 percent.
The Fed lifted the overnight rate by a quarter percentage point 17 times in a row between June 2004 and June 2006, and has been on hold ever since.
There was solid demand for an afternoon auction of $8 billion in new 10-year notes, but the results failed to stem Thursday's prices losses.
New Fed statistics Thursday showed some stabilization for the battered corporate commercial paper market.
During the week to Wednesday, the outstanding volume of commercial paper dropped by $8.2 billion to $1.917 billion, marking a much smaller decline than has been seen since investors began shunning the credit markets in August. However, the result still marked the fifth straight week of decline for a normally robust market.
