Hopes for Another Easing by Fed Keep Money Flowing Into Market

Treasury prices were slightly higher at the end of yesterday's trading session as the sluggish recovery and hopes for another Fed easing continued to draw investors into the market.

Late in the day, the 30-year bond was up 1/8 to yield 7.80%.

"We continued the rally we saw on Friday," said Steven Slifer, a money market economist at Lehman Brothers. "There just seems to be this continued interest in buying Treasuries because people think we're getting close to another Fed easing move."

Many Treasury traders think the Federal Open Market Committee will adopt a bias toward easing at today's meeting but wait until it sees Friday's September employment report before signaling a change in monetary policy.

Mr. Slifer said a 40,000 to 50,000 increase in September nonfarm payrolls would allow the Fed to move interest rates lower.

Since on Friday only three weeks will have passed since the last time the Fed cut interest rates, on Sept. 13, policymakers might wait another week to see the September inflation reports before acting again, he said.

"But I think the odds are pretty good that the Fed will ease between now and the middle of the month," Mr. Slifer added.

Activity yesterday was muted, as the end of the fiscal quarter and the approach of the FOMC meeting kept some participants on the sidelines.

But traders said that as long as they see steady demand for Treasury securities from retail investors, prices will continue to grind higher.

A bond trader called the market "bullet-proof."

"Every day, there seems to be renewed buying interest, coming mostly from the money funds," the bond trader said.

"The market's very expensive, but there are still net inflows of money," a coupon trader said. "Here we are through 6% on two-years and through 7% on five-years, and the market's still seeing very good demand."

In addition to fund managers, traders said investors were moving money out of corporate and mortgage-backeds into Treasury securities and moving funds already in Treasury paper further out the yield curve in search of better returns.

"Everybody is being forced out the curve," Mr. Slifer said. "People who usually buy twos are buying fives, and people who buy fives are forced out to tens."

Mr. Slifer said that even though extension trades have been common in recent weeks, fund managers have not extended their average durations very far beyond their benchmarks. "If people were to become much more bullish, there's plenty of room for them to extend further and create a lot of impetus for buying," he said.

A potential source of future funds is the stock market, Mr. Slifer said.

He is expecting second-half growth of only 1.5%, and said that if growth is that lackluster, the stock market eventually will realize it has built in overly optimistic profit expectations.

"Somewhere along the line, you could get some of these asset allocators reallocating from equities into bonds," he said.

The market ignored yesterday's Chicago purchasing managers' report, which fell to 55.3% in September on a seasonally adjusted basis from the 56.6% reading in August.

New orders, vendor delivery, and unfilled orders all rose substantially in September, but production fell by five points and employment edged one point lower.

Until recently, the Treasury market has followed both the national and Chicago purchasing managers' reports closely.

Kathleen Camilli, chief economist at Maria Ramirez Capital Consultants, said the lack of interest in yesterday's report showed the market has learned that even though the manufacturing sector is staging a comeback, it is only one segment of the economy.

"I think people realize watching the manufacturing data is not necessarily an indication of what's happening to the economy as a whole," she said.

The December bond future contract closed 1/8 point higher, at 100.

In the cash market, the 30-year 8 1/8% bond was 5/32 higher, at 103 18/32-103 23/32, to yield 7.80%.

The 7 7/8% 10-year note rose 9/32, to 102 28/32-103, to yield 7.43%.

The three-year 6 7/8% note was up 3/32, at 101 21/32-101 23/32, to yield 6.20%.

Rates on Treasury bills were lower, with the three-month bill off two basis points, at 5.12%, the six-month bill off three basis points, at 5.11%, and the year bill two basis points lower, at 5.12%.

Sumitomo Opens New Unit

Sumitomo Bank will soon open a subsidiary that deals in U.S. securities, including Treasuries, agencies, and commercial paper, the bank said yesterday.

Norah Hughes was named president of the new unit, Sumitomo Bank Securities, Sumitomo said. Until recently, Ms. Hughes headed the primary dealership at SBC Government Securities, a subsidiary of Swiss Bank Corp.

Sumitomo Bank Securities will have $40 million of capital and will begin operation as soon as it completes all the necessary regulatory procedures, Sumitomo said.

Ms. Hughes said the company is not aiming to become a primary dealer in Treasury securities.

In fact, she said, most Treasury trading will probably be for the bank's own account, since Sumitomo does not expect its customers to be that interested in Treasuries.

"We will be involved in a few other products we feel our customer base will have more interest in," like commercial paper and private placements, she said.

Ms. Hughes has hired two people so far and plans to employ up to 25.

The new unit will operate as part of Sumitomo's wholly owned U.S. subsidiary, Sumitomo Bank Financial Services Inc.

Sumitomo, ranked as the second-largest bank in the world by American Banker, first dipped its toes in the U.S. markets when it invested $500 million in Goldman, Sachs & Co. in 1986 through another subsidiary, Sumitomo Bank Capital Markets.

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 5.25 5.34 5.47

6-Month Bill 5.30 5.45 5.58

1-Year Bill 5.39 5.51 5.58

2-Year Note 5.97 6.12 6.29

3-Year Note 6.20 6.35 6.63

4-Year Note 6.43 6.57 6.76

5-Year Note 6.89 7.05 7.29

7-Year Note 7.23 7.34 7.62

10-Year Note 7.43 7.53 7.78

20-Year Bond 7.69 7.80 7.97

30-Year Bond 7.80 7.87 8.03

Source: Cantor, Fitzgerald/Telerate

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