Treasurys Advance on Volatility in Stock Prices; Traders Seem Unfazed by Mild Inflation Data
By Michael S. Derby, 11/17/2000, The Wall Street Journal, (Copyright (c) 2000, Dow Jones & Company, Inc.)

NEW YORK -- Treasurys ended higher, lifted by market positioning activity and by expectations that investors might shift funds out of wobbly stock markets.

The bond market shrugged off a report showing moderate inflationary pressures at the consumer level for October.

Instead, traders said, much of the day's trade was simply a continuation of the repositioning -- including a move toward longer-dated issues -- that began after the Federal Reserve's latest policy statement Wednesday.

Late in the day, the benchmark 10-year Treasury note was up 10/32 point, or $3.125 per $1,000 face value, at 100 13/32. Its yield fell to 5.660% from 5.711% late Wednesday, as yields move inversely to prices.

Meanwhile, the 30-year Treasury bond's price was up 13/32 at 107 3/32 to yield 5.737%, down from 5.767% late Wednesday.

The market reacted little to a report by the Labor Department that the consumer price index rose 0.2% in October after a 0.5% gain in September. The core CPI, which excludes the volatile food and energy components, also was subdued, rising an expected 0.2% in October after September's 0.3% advance. The October figures were in line with forecasts by Wall Street economists.

Year-over-year, the CPI decelerated in October, rising at a 3.4% rate after September's 3.5% advance. The core measure of the CPI rose 2.5% in annual terms.

"Everyone was expecting this number," and the market was positioned accordingly, said Drew Matus, an economist with Lehman Brothers Global Economics, explaining the lack of market reaction.

Although not as dominant an influence as in recent weeks, stocks played some role in yesterday's dealings, traders said.

A steep slide in the technology-laden Nasdaq Composite Index -- which ended down 133.61 points at 3031.88 -- buoyed Treasury prices, as traders anticipated that some investors would move money from stocks to the relative safety of the government-securities market.

Meanwhile, the Fed's actions Wednesday also continued to influence bond investors, traders said.

The Federal Open Market Committee, the Fed's policy-setting arm, left interest rates unchanged. But in a statement, it warned that "risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future."

Investors interpreted that to mean that the Fed remains vigilant for evidence of inflation and responded by buying long Treasury maturities, which are the most sensitive to inflation prospects, while sell

"There was enough [in the Fed's statement] to make people feel comfortable" about 10-year notes and 30-year bonds, said William Hornbarger, head market strategist with A.G. Edwards & Co. in St. Louis.

Some also believe the Fed is making sufficient progress in containing inflation that before long, it is likely to begin easing policy.

"The Fed statement was positive and supports the notion that next move from the central bank will be lower rates," said David Schroeder, a fixed-income fund manager with California-based American Century.

Traders said the long end of the market also drew support early yesterday from another Treasury Department buyback of outstanding issues.

Treasury paid $1.31 billion to buy back $1 billion in outstanding debt maturing between February 2010 and November 2014. The average yield seen in the operation was 5.903% and the bid-to-cover, a gauge of investor interest, stood at 4.90.

The Treasury is retiring $30 billion in bonds this year by way of its buyback operations.

Many traders expect a quiet day today, as there aren't any scheduled releases of top-tier economic data. As a result, prices should be able to hold to a fairly tight range as the market continues to wait out the outcome of the still-unresolved presidential election, traders said.

American Century's Mr. Schroeder, while sanguine about interest rates, said he sees much of the Treasury market priced a bit on the high side.

Some of the best investment opportunities are in the Treasury's inflation indexed Treasurys, known as TIPS, he said. "Relative to regular Treasurys, [TIPS] yields should fall," which would prove lucrative to holders, Mr. Schroeder said.

                Par  Par      High     Wtd Avg
        Mat     Amt  Amt     Accept    Accept
Coupon  Date  Offer Accept    Price     Price

11.750  02/05 -101     910    n/a        n/a
10.000  05/05 -105     640    n/a        n/a
12.750  11/05 -102     520    n/a        n/a
13.875  05/06 -112     250    n/a        n/a
14.000  11/06 -112     600    n/a        n/a
10.375  11/07 -121,280 580   125.289     125.267
12.000  08/08 -131,228 340   137.484     137.463
13.250  05/09 -142    7080   148.593     148.593
12.500  08/09 -143     930    n/a        n/a
11.750  11/09 -142     400    n/a        n/a

 Amounts in millions, prices in decimals.

 *Amount outstanding after operation. Calculated using amounts reported 
on announcement.

Corporate and Junk Bonds

A debt default by Reliance Group Holdings Inc. had no appreciable effect on its outstanding junk bonds, which have traded at distressed levels since the summer, traders said. Its 9% senior subordinated notes of November 2000 traded at 93/4, unchanged from Wednesday.

The insurance concern, which is in talks about a restructuring with bondholders, lenders and regulators, failed to make a $291.7 million principal payment due Wednesday. In a news release, the company said it also didn't make a coupon payment due Wednesday on 9.75% senior subordinated debentures that mature in 2003.

Elsewhere, PSINet Inc. bonds jumped about two points after it said it had hired Goldman Sachs to weigh various options, including a sale of all or part of the company. PSINet's 101/2% notes due 2006 traded at 38, up from 36 Wednesday.

In investment-grade bond trading, yield spreads were mostly unchanged.

Investors were awaiting a $400 million sale of three-year notes by Navistar Financial Corp. Chase Securities Inc. is serving as lead manager for the securities, which are rated Baa3 by Moody's Investors Service and triple-B-minus by Standard & Poor's.


  1. "A steep slide in the technology-laden Nasdaq Composite Index ... buoyed Treasury prices."  Why should this be so?  Why would investors wanting to get out of tech stocks not go to other stocks?  Why would they go to the Treasury market?
  2. "... much of the day's trade was simply a continuation of the repositioning -- including a move toward longer-dated issues -- that began after the Federal Reserve's latest policy statement Wednesday."  Why is the market moving towards longer-dated issues?
  3. How should the outcome of the Presidential election affect interest rates?
  4. How would you expect the economic news to affect spreads between corporates and Treasuries?