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Treasurys Sink Ahead of Auction



May 07, 2008 – Comments (0) | RELATED TICKERS: UBB , ITU

May 7, 2008 10:00 a.m.

The 10-year note fell, taking other Treasury maturities lower as well, as market participants looked to build a discount into the forthcoming auction.

The two-year note was recently down 1/32, or 31 cents per $1,000 invested, at 99 16/32 yielding 2.39%, and the 10-year was 8/32 lower at 96 19/32 for 3.92%. The five-year was down 5/32 at 99 24/32 for a 3.18% yield, and the 30-year was 6/32 lower at 95 16/32 yielding 4.66%.

Yields and prices move inversely.

The only data crossing their tracks in early U.S. trade were nonfarm productivity numbers, which showed productivity up 2.2% in the first quarter, easily beating the expected 1.7% increase, and a substantial pickup from the 1.8% rate in the last quarter of 2007. The improvement owed mainly to a big jump in manufacturing productivity, suggesting U.S. firms are adjusted quickly to the economic slowdown by shedding workers and cutting back on hours worked.

The inflation angle in the Labor Department's report was also reasonably encouraging, at least for Treasurys investors, as unit labor costs rose 2.2% in the first three months of the year, below forecasts for a 2.8% increase. Labor costs were up just 0.2% from one year ago, the slowest rise since 2004, an indication that the economic slowdown is making it harder for workers to command higher wages.

The market paid scant attention to Federal Reserve Board Governor Randall Kroszner early Wednesday, as his comments in Cincinnati closely echoed those of Chairman Ben Bernanke a couple of days earlier. His speech focused on the impact of the ailing housing market on local communities, and reiterated the point that foreclosures are likely to have increased in the first quarter.

The most immediate material concern for the government bond market Wednesday however is the $15 billion of new 10-year notes on the way at 1:00 p.m. EDT. The latest two- and five-year sales have drawn only tepid demand in a market some still feel is somewhat overpriced, and is facing more competition from a resurgent investment grade corporate bond market. The main activity so far in the session has been selling at the long end to try and secure a better deal.

"It's really the 10-year sector that's getting blasted," said Scott Gewirtz, head of Treasury trading at Lehman Brothers in New York. "To me it's just a classic auction set-up."

Otherwise this morning, investors are looking to the latest feedback on the housing market, with pending home sales on the way at 10 a.m. EDT (1400 GMT).

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