-->07/29/2003
Dow Jones News Services
(Copyright © 2003 Dow Jones & Company, Inc.)



By Agnes T. Crane
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Treasurys were hit hard Tuesday, falling prey to pervasive negative sentiment and aggressive selling by mortgage investors that overwhelmed a brief rally earlier in the day in the wake of weak consumer confidence data.

The losses put the bond market on a weak footing - with prices ending the day around session lows - ahead of the Treasury Department's quarterly refunding announcement and heavyweight economic data slated for release later in the week.

The rush to sell firmed a sense that the bond market, even in the absence of economic data pointing firmly towards a recovery, may have entered a self-fulfilling selling frenzy.

"The market is in bad shape," said Peter McTeague, bond market strategist at RBS Greenwich Capital in Greenwich, Conn. He reckons technical levels mean little at this point as the capitulation by mortgage investors in the works mean yields could go much higher still.

When Treasury yields rise, mortgage investors are forced to sell longer-dated government securities to adjust their portfolios to the changing interest rate environment. Just as buying from mortgage investors accelerated the decline in Treasury yields when interest rates fell, the selling is expected to exacerbate the rise in yields.

"It's viscous cycle feeding on itself," said McTeague, who also said wider swap spreads are contributing to the pressure on Treasury yields. The 10-year interest rate swap spread, moved out to 48.5 basis points, its widest level of the day, from 43.75 late Monday. The widening reflects a move by investors to essentially hedge interest rate risk at a time of such large moves in markets.

Even the agency market played a part in the day's volatility, where selling in that area of the fixed income universe helped to push swap spreads wider.

David Ging, bond strategist at Credit Suisse First Boston in New York, said"It's going to take some sort of event to stem this tide" of selling, such as softer-than-anticipated jobs and manufacturing data, reports that will be released Friday.

In a day characterized by sharp price swings, Treasurys opened under pressure but quickly found their footing after a weaker than expected consumer confidence report sparked a wave of buying that pushed the yield on the 10-year note down to a session low of 4.19%.

The buying, however, proved short-lived and selling once again gripped the market, fueled by mortgage investors who are forced to sell government securities when yields rise.

At 3:45 a.m. EDT (1945 GMT), the 10-year Treasury note stood at 93 21/32, down 31/32 to yield 4.43%, its session high and its highest level since July 31, 2002. The 30-year Treasury was down 1 15/32 at 100 13/32, yielding 5.33%.

The five-year price was down 18/32 at 97 5/32 to yield 3.27%, while the three-year was down 7/32 at 99 17/32 to yield 2.17% and the two-year price was down 4/32 at 99 20/32 to yield 1.68%.

Looming supply also weighed on a market that will have to absorb new three-, five- and 10-year notes early next month as part of Treasury's quarterly refunding package. Wall Street estimates put the total at $60 billion or more, above the record $58 billion sold at the last refunding in May. Treasury is set to announce the details Wednesday.


(MORE) Dow Jones Newswires

07-29-03 1602ET