The Wall Street Journal, December 15, 2009
U.S. Treasury prices were lower Tuesday after a greater-than-expected jump in wwwucer prices in November and as traders adjusted positions ahead of results of the Federal Reserve’s last monetary policy meeting of the year on Wednesday.
Trading was thin, with many market participants having already made their year-end bets and staying on the sidelines.
In mid-morning trade, the two-year Treasury note was off 2/32 to yield 0.88% and the 10-year note was down 14/32 to yield 3.60%. The 30-year Treasury was yielding 4.53%.
Investors had several pieces of key economic data to digest Tuesday morning as they geared up for the Federal Reserve policy meeting, the highlight of the week. Tuesday’s first report, an update on wwwucer prices, weighed on the market, and especially on longer-term Treasurys, which are the most sensitive to inflation. U.S. wholesale prices jumped by nearly twice as much as expected in November, driven by surging energy costs, and core prices posted their largest increase in more than a year.
The wwwucer-price index for finished goods rose 1.8% on a seasonally adjusted basis in November, after rising by an unrevised 0.3% in October. Economists surveyed by Dow Jones Newswires had expected prices would climb by 1%. Core PPI, which excludes volatile food and energy prices, rose 0.5%, driven up by higher prices for light motor trucks and cigarettes. The increase in core PPI is the largest since October 2008 and is more than double the 0.2% rise that was expected. Rising inflation hurts longer-dated Treasurys, because rising prices eat into their fixed returns.
A subsequent report on industrial wwwuction showed U.S. industries elevated wwwuction in November more than expected, suggesting companies might be rebuilding supplies.
"The bond market is not taking today’s data well," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. The market "is having a very tough December," he said, and if the selloff holds, a case can be made that the yield on the 10-year is moving outside of its trading range. At 3.60%, the 10-year yield is at its highest point since mid-August.
Brian Edmonds, head of interest rates at Cantor Fitzgerald & Co. in New York, cited 3.62% as a key level for the 10-year yield. The 10-year hit that level Tuesday, but backed off. Pushing through it could put the 10-year on track to 3.75%, he said. Ultimately, Mr. Edmonds sees the 10-year yield rising above 4% next year amid growing concerns about sovereign debt.
"I don’t think the market is ready to ratchet up to higher rates quickly, but there is pressure early next year, especially if the economic news continues to print strong," he said.
Meantime Tuesday, the market responded calmly to a report from the New York Fed that showed that manufacturing activity in the New York area deteriorated in November. The New York Fed’s Empire Manufacturing Survey showed its general business conditions index fell by about 21 points to 2.55 from 23.51 in November. The survey’s index of prices paid moved to 19.74 from 10.53 in November, suggesting that price increases are not being passed along.
Despite the data deluge early this week, Treasury market participants are more focused on Wednesday’s Fed statement, which will be its last official word this year.
The market isn’t expecting any change in the Fed’s key interest rate, which has remained in a 0% to 0.25% band since December 2008, nor in the discount rate, which some investors have speculated about over the last few days.
The Fed, though, could tweak its assessment of the economy after several recent better-than-expected pieces of economic data, including a much cheerier November payrolls report and better consumer-sentiment figures.