January 09, 2009 |
|Investors weigh a colossal amount of supply coming to market with a slew of negative economic news and anxiety about Friday's unemployment report.|
NEW YORK (CNNMoney.com) -- Government bond prices reversed their new year's slide Thursday as investors weighed a flood of supply against a potentially sour unemployment report being released by the government on Friday.
The retail sales numbers for December came in early Thursday morning and showed that consumers really held back in their holiday spending.
Thursday morning also brought grim economic news, with the Labor Department saying that 467,000 Americans filed for first-time unemployment benefits last week. That is fewer than expected but still much worse than in the same week during 2007.
Investors are also awaiting the government's monthly unemployment report due out Friday morning.
"The overriding event of the week is going to be the unemployment report tomorrow morning," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson.
Expectations call for the unemployment rate to have climbed to 7% in December from 6.7% in November, and job losses totaling 500,000 for the month, according to a consensus estimate of economists from Briefing.com.
"If the numbers come out worse than expected, the markets are kind of set up for that [but] people might sell a little bit," said Steve Van Order, fixed-income strategist at Calvert Funds.
A report from payroll processor ADP released Wednesday showed that the private sector announced 693,000 job cuts in December. And outplacement firm Challenger, Gray & Christmas showed 166,348 announced job cuts last month.
Such negative news about the economy and job losses caused government debt to be in high demand toward the end of 2008. Prices reached record highs, and yields across all maturities hit record lows. Uncle Sam's debt is considered one of the safest places to keep assets, so in the face of unprecedented market volatility, investors head to the bunkers and tuck their cash away.
But as the new year rolled over, investors looked at record high Treasury prices with skepticism, especially as President-elect Barack Obama rolled out his massive stimulus package, which is aimed at creating jobs by rebuilding the nation's infrastructure. With a rescue package in the pipelines, investors are started to bet that the worst of the recession was over.
When investors bet that the economy is going to grow and recover, they dump Treasurys in favor of more profitable investments, such as municipal bonds, high-grade corporate bonds and, in some cases, equities.
Additionally, a flood of Treasury supply coming to market as the government works to fund the various rescue packages it has rolled out weighed on government bond prices.
"Supply is a huge factor," said Hurley. "We are already looking at in excess of a $1 trillion deficit for fiscal year '09 - and that is before we have the Obama stimulus plan enacted. So we could easily see a deficit in excess of 2 trillion - and that is a lot of bonds that have to be issued."
For the first four trading days of the new year, government debt prices mostly fell, working back off the record highs set a few sessions earlier, and indicating investor confidence in other, riskier parts of the marketplace.
But the momentum of investor confidence hit a speed bump Thursday as stocks turned lower, adding to Wall Street's heavy losses on Wednesday.
Government debt prices: The price on the benchmark 10-year note rose 16/32 to 111-12/32 and its yield dipped to 2.45% from 2.49%. Bond prices and yields move in opposite directions.
Despite the flood of supply that is surely headed for the bond market, there is still an appetite for the safety of the debt. The government auctioned off $16 billion worth of re-opened 10-year notes Thursday, and the auction was healthily overbid. The bid-to-cover ration was 2.59, meaning that there was $41 billion worth of bids for $16 billion of available debt.
The 30-year bond edged up 1/32 to 128-10/32, and its yield fell to 3.04% from 3.07% late Wednesday. The price on the longbond had been falling quickly, sinking nearly five points in trade Monday, as investors eagerly looked for other more profitable asset classes.
The two-year note bucked the trend, dipping 1/32 to 100-5/32, with its yield at 0.84%.
The yield on the 3-month bill - widely considered a gauge of investor confidence - was 0.08%, from 0.11%.
Lending rates: Bank-to-bank lending rates continued to tick lower Thursday, a positive sign for the once-clogged credit markets.
"The central banks have effectively flooded the global banking system with all kinds of currencies, especially dollars," said Van Order, and those unprecedented actions have brought lending rates lower.
The 3-month Libor rate fell to 1.35%, down from 1.40% Wednesday, according to data available from Bloomberg.com. The last time Libor rates have been at such low levels was June 2004.
The overnight Libor rate also edged lower, falling to 0.10% from 0.11%, setting a new all time record for the short-term lending rate.
Libor - the London Interbank Offered Rate - is a daily average of rates 16 different banks charge each other to lend money in London, and it is used to calculate adjustable-rate mortgages. More than $350 million in assets are tied to Libor.
Central banks around the globe have been slashing interest rates to spur economic activity. On Thursday, the Bank of England cut its key lending rate by 0.5% to a historic low of 1.5%.
Two market gauges were mixed.
The "TED spread," narrowed to 1.27 percentage points from 1.3 percentage points. The higher the spread, the less willing investors are to take risks. The rate widened to historic levels as as the credit market froze in the fall. As governments around the world have eased off of lending rates and worked to increase liquidity in the marketplace, the spread has come back down.
Another indicator, the Libor-OIS spread, rose to 1.16 percentage points from 0.94 percentage point Wednesday. The Libor-OIS spread is a measure of how much cash is available for lending between banks. It's used for determining lending rates. The bigger the spread, the less cash is available for lending.
Commercial paper: A combination of lower interest rates and government intervention have helped ease bank-to-bank lending rates.
One government program, the Federal Reserve's Commercial Paper Funding Facility, which started in late October, allows companies to sell highly rated 3-month debt to the government in exchange for ultra-low interest rates.
Commercial paper is short-term debt that big businesses and financial institutions issue to pay for day-to-day business operations like payroll and utilities. The debt was traditionally purchased by institutional investors as a safe and secure asset, but since Lehman Brothers' demise, investors have been more hesitant to purchase the paper, leaving some companies unable to get the cash they need to meet their daily responsibilities.
A Fed report released Thursday showed that business lending expanded in the first week of the new year, after contracting in the last two weeks of 2008. The amount of so-called commercial paper that was sold in the seven days ended Jan. 7 rose by $83.1 billion, or nearly 5%, to a seasonally adjusted $1.76 trillion.