Treasury prices posted big losses during Friday's shortened trading session as the death throes of the market's hopes for immediate Fed rate cuts caused massive selling.
The sell-off pushed the 30-year yield above 7.50% for the first time in more than two months. The long bond closed 7/8 point lower on the day, and off 2 1/8 points on the week, to yield 7.51%.
"It was an ugly day, and it's been an ugly week," said Scott Winningham, chief market analyst at Stone & McCarthy Research Associates.
Traders and analyst said the bond market had overreacted and should retrace some of last week's losses over time.
Even though the Federal Reserve did not ease monetary policy last week, the sluggish economic growth in recent months is fundamentally bullish for bonds and suggests the Fed will be forced to lower rates again eventually, they said.
"I think there is value in this market because the Fed is going to ease further," said Joseph Liro, chief economist at S.G. Warburg & Co.
But Liro said it was not likely the market will immediately rebound. "It will take time to undo the damage we've done here."
Treasury prices had declined last Tuesday and Wednesday as participants realized the widely anticipated Fed rate cuts were not going to happen.
But some easing hopes apparently lingered, because Friday's sell-off was triggered by a report in the Financial Times that a senior Fed official said policymakers had kept rates steady because they thought the recent weakness in economic statistics was "inconclusive."
The Financial Times article "should dash the last of the hopes that the Fed was going to ease after the FOMC meeting" last Tuesday, Liro said.
The Fed official quoted in the article said recent data showing weakness were partly offset by stronger car, truck, and retail sales, but economists criticized his interpretation of those numbers.
The car sales for the last 10 days of September jumped to a 6.8 million annual rate from 6.1 million in the middle of the month, but analysts said car sales traditionally improve in late September as manufacturers try to get rid of inventory at the end of the model year. And the chain store sales reported last Thursday may have been inflated because the later-than-usual Labor Day drew some sales from August into September.
Traders said the Financial Times article sparked off massive liquidations. As prices fell, the market broke through key technical support levels, which inspired more selling and increased the downward momentum, they said.
"This is just a technically driven market," a note trader said. "We're breaking support levels and people are bailing out."
A coupon trader said the approach of the long weekend was another factor in the sell-off because many traders who had bet on a Fed easing and were stuck with unprofitable long positions decided it would be wise to get out of those positions before the weekend.
The cash market in U.S. government securities will be closed today for the Columbus Day holiday.
Traders said news that a U.S. citizen had been seized by Iraqi forces in Kuwait and the approach of yesterday's debate between the presidential candidates were also factors in the sell-off.
Winningham said some technical analysts thought the sell-off Friday had pushed prices below the neckline of a head-and-shoulders chart pattern.
That would be quite bearish, he said, since technical theory says that move means the market will now decline another 3 1/2 points, which would put the 30-year yield near 7 3/4%.
"My interpretation of the fundamentals is inconsistent with this scenario," Winningham added. "But if I'm correct in thinking the fundamentals still favor a firm bond market, it should soon find a bottom and turn around again."
The December bond futures contract closed 3/4 lower at 103 17/32.
In the cash market, the 7 1/4% 30-year bond was 7/8 lower, at 96 23/32-96 27/32, to yield 7.51%.
The 6 3/8% 10-year note fell 30/32, to 98 29/32-99 1/32, to yield 6.50%.
The three-year 4 5/8% note was down 1/2, at 100 14/32-100 16/32, to yield 4.43%.
In when-issued trading, the 6% seven-year note was 23/32 lower, at 99 13/32-99 17/32, to yield 6.08%. The new note was auctioned at a 6.01% average yield last Wednesday.
Rates on Treasury bills were higher, with the three-month bill up four basis points at 2.83%, the six-month bill up eight basis points at 2.97%, and the year bill 1 1 basis points higher at 3.06%.
Treasury Market Yields
Friday Week Month
3-Month Bill 2.86 2.66 2.97
6-Month Bill 3.03 2.84 3.01
1-Year Bill 3.15 2.96 3.16
2-Year Note 3.96 3.67 3.84
3-Year Note 4.43 4.10 4.34
5-Year Note 5.49 5.19 5.31
7-Year Note 6.08 5.77 5.87
10-Year Note 6.50 6.23 6.35
30-Year Bond 7.51 7.32 7.28
Source: Cantor, Fitzgerald/Telerate