For Educational purposes only!

Bonds up on supply fears
Long-term yields fall as investor appetite for 30-year stays strong
February 09, 2000: 9:25 a.m. ET

NEW YORK (CNNfn) - Treasury bonds rose for the second straight session Wednesday as investors continued to snap up the government's shrinking supply of long-term dept.

"It's the same story and I think it's going to continue and accelerate," said Mike Boss, bond futures trader at IBJ Lanston Futures.

Boss said most of the buying is coming from large insurance companies, which are required to hold a portion of long-term debt for reserves, and mutual funds whose investment objectives mandate holding government bonds.

With the Treasury Department reducing the amount of money it borrows while saying it will buy back some of its own securities, the market has focused on supply over economics.

"We are disengaged a bit from (economic) fundamentals," Boss said.

Just before 9:10 a.m. ET, the price of the 30-year Treasury bond rose 15/32 to 99. Its yield, which moves inversely to its price, fell to 6.19 percent from 6.23 percent Tuesday.

The yield on the 10-year note -- now considered the better benchmark of inflation expectations given the 30-year's rally -- fell to 6.60 percent from 6.61 percent Tuesday.

The inverted yield curve, in which shorter-term securities such as bills and notes yield more than bonds, inverted further Wednesday as 30-year bonds drew the most buyers.

The trend may only continue with the second leg of the Treasury Department's sale of new securities. The agency will sell $10 billion in 10-year notes Wednesday and $10 billion in 30-year bonds Thursday. The bond deal is expected to have the better demand. A $12 billion sale of five-year notes Tuesday received a cool reception.

Still, bonds soared more than a point Tuesday, helped by after a government report showing strong economic growth with minimal inflation. The news eased investors' worst fears about Federal Reserve interest rate hikes ahead.

U.S. worker productivity surged to an eight-year high in the fourth quarter and wage costs posted their biggest contraction in nearly four years, the Labor Department said.

While the news was not enough to change forecasts of a moderate interest rate hike next month, analysts said it might help keep the Federal from raising interest rates aggressively.

In a rare development, the yield on the 30-year note fell below the yield on the government's one-year bill.

Investors typically demand higher yields on longer-term debt to compensate for the risk that inflation will erode the value of their holdings over time. But the prospect of fewer bonds continues to lure buyers of long-term debt.

In the day's only economic indicator, wholesale inventories for December are seen rising 0.7 percent, according to analysts surveyed by Briefing.com. The report is not expected to move the market.

Link

++++++++++++++++++++++++++++++++ Watch for more dire news for short sellers in the next few days.

-- Farouk Madjurian (fmadjurian@hotmail.com), February 09, 2000