Brian Edmonds Comments: Bond Sell-off Back In Force

December 10, 2010,

U.S. Treasury prices fell on Friday, as stronger-than-expected economic data and hedging on pending corporate bond supply kicked off fresh selling after a pause in response to a strong 30-year bond sale.

Bond dealers sold Treasuries to lock in yields on the corporate bonds they will underwrite next week, while investors reduced their bond holdings after government data on prices and trade suggested stronger-than-expected economic growth in the fourth quarter and easing deflation risk.

"It seems like we have rate-lock selling ahead of next week’s supply. It tends to be very aggressive," said Brian Edmonds, head of rates trading at Cantor Fitzgerald in New York.

U.S. investment-grade bond issuance totaled nearly US$18 billion so far this week, which tied as the fourth biggest deal week in 2010, according to IFR, a Thomson Reuters service.

"We also have some traders long coming out of Thursday’s auction and they were trying to unload their positions ahead of the weekend," Edmonds said.

The renewed sell-off wiped out earlier gains from overseas buying in the wake of a strong 30-year bond auction on Thursday that bolstered confidence in holding U.S. government debt. This dashed the hopes of some market stability following a dramatic sell-off earlier this week.

"This is still a treacherous market for long-term investors," said Mike Franzese, head of Treasury trading at Wunderlich Securities in New York.

The benchmark 10-year note yield US10YTRR last traded at 3.23% after it touched the 3.18% area for a second straight day but failed to breach subsequent chart levels in the 3.15-3.16% area.

The 10-year yield recorded a six-month peak of 3.33% earlier this week, as investors liquidated their long bond positions due to inflation and deficit fears in response to an announcement of a deal between President Barack Obama and Republican lawmakers to extend federal tax cuts.

This week’s yield spike also kindled worries of rising mortgage rates and other consumer borrowing costs, which are referenced against Treasury yields.

After surviving this week’s US$66 billion in coupon-bearing supply, traders will get snapshots on the economy in advance of the Federal Reserve’s policy-setting meeting next Tuesday.

Apart from Friday’s government data, Thomson Reuters and University of Michigan will report at 9:55 a.m. EST on their figures on consumer sentiment in early December, which economists predict improvements from November.

Separately, the Federal Reserve will announce at 2 p.m. EST its next schedule of Treasury purchases tied to its US$600 billion quantitative easing program, known as QE2 and reinvestment of proceeds from maturing mortgage securities.