Treasuries Struggle to Hold Slight Gains

Wed Jul 28, 2004
By Wayne Cole

NEW YORK (Reuters) - Treasury prices struggled to hold the slimmest of gains on Wednesday as durable goods data proved soft on first sight, though upward revisions to past figures complicated the picture.

The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) edged up 2/32 in price, lowering yields to 4.61 percent from 4.62 percent. The gains were paltry compared to the heavy losses suffered in the previous two sessions, however.

Orders for durable goods rose 0.7 percent in June when analysts had expected a 1.9 percent bounce, but May's drop was halved to 0.9 percent. Still, orders excluding transport and defense were down for the third month in a row.

"On the headline, the numbers look quite disappointing for June, but if you look at the revisions to May it takes some of the edge off the disappointment," said Cary Leahey, senior U.S. economist at Deutsche Bank Securities.

"Still, you come away from the data with the feeling that the second quarter came in like a lion and went out like a lamb," he added.

Capital goods orders excluding defense and aircraft, a proxy for future business investment, did improve by 1.2 percent and the previous month's fall was almost halved, but that was softer than industry surveys had suggested.

Unfortunately for bond bulls, investors have already discounted the softness in June and are looking for an economic pick-up this quarter. Early July data on consumer and business confidence seem to bear out the recovery scenario, and Federal Reserve officials have made no secret of their optimism.

That in turn has convinced much of the market that the central bank will hike interest rates by a quarter-point at each if its remaining four meetings this year, taking its official fed funds rate to 2.25 percent in time for Christmas.

Such an outlook is hardly favorable for debt that pays a fixed-income and Treasuries had trouble holding even the smallest gains. The five-year note (US5YT=RR: Quote, Profile, Research) turned flat at 3.84 percent. At the long end, 30-year bonds (US30YT=RR: Quote, Profile, Research) rose then dropped back to be steady at 5.32 percent.

Two-year yields (US2YT=RR: Quote, Profile, Research) dipped slightly to 2.78 percent from 2.80 percent. Treasury auctions $24 billion in new two-year paper later on Wednesday and the omens are not good after a sale of 20-year inflation-protected notes went badly on Tuesday.

Optimists argue that the two-year paper should win a better reception if only because they are of so much shorter duration than TIPS and thus less sensitive to the risk of higher official interest rates.

But dealers are not so sure and will be inclined to cheapen prices into the auction in the hope of attracting customer demand.

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