Bond Prices Fall

03/06/2006

NEW YORK (AP) - After a brutal week for bonds, U.S. Treasurys were coming under renewed selling pressure Monday as the yield on the benchmark 10-year note briefly climbed to 4.73 percent, its highest point since June 2004.

Traders said the move was not tied to any specific catalyst but appeared to more a “continuation of selling from last week,” said Scott Gewirtz, head of Treasury trading at Lehman Brothers in New York.

“It’s Monday morning, conditions are very thin,” he said.

Some traders said it may be partly connected with moves by mortgage investors who are unwinding hedges put in place in the Treasurys market to prevent the duration of their portfolios from extending. Duration measures a portfolio’s sensitivity to changes in interest rates.

At midday Monday, the price of the Treasury’s 10-year note was down 7/32 point, or $2.188 per $1,000 in face value, around midday Monday, while its yield rose to 4.71 percent from 4.69 percent late Friday. Prices and yields move in opposite directions.

The 30-year bonds were down 19/32 point and yielded 4.70 percent, up from 4.66 percent late Friday, according to Moneyline Telerate. Two-year Treasury notes were flat and yielded 4.75 percent, unchanged from late Friday.

Yields on one-month Treasury bills fell to 4.40 percent as the discount fell 0.03 percentage point to 4.33 percent. Yields on three-month Treasury bills fell to 4.60 percent as the discount fell 0.01 percentage point to 4.48 percent. Six-month yields rose to 4.76 percent as the discount rose 0.01 percentage point to 4.58 percent.

The bond market is bracing for what could be another tough week. After coming under steady selling pressure last week, partly sparked by weakness in European government bonds, investors are bracing for a healthy employment report for February and a re-opened 10-year note sale on Thursday.

But Andrew Brenner, head of institutional fixed income at Investec in New York, said that “the key to this week’s trading is not the unemployment number but how the market trades at its year lows.”

Also key is a decision by the Bank of Japan on interest rates. The bank’s policy board begins a two-day meeting Wednesday, and many are expecting it to lift interest rates from the near-zero levels that have prevailed over the past decade.

The European Central Bank also lifted short-term rates last week and painted a positive view of the euro zone economy, while the Federal Reserve is expected to push the federal funds rate to at least 5 percent from its current 4.50 percent.

Given that, “we wonder who is going to buy the long end,” Brenner said.