US Treasuries turned lower on Wednesday after a late rally in stocks lured investors out of bonds, despite a solid auction and weak durable goods figures. The market began to waver as soon as equities gained traction. As the rise in stocks grew in conviction, bonds caved and trickled into negative territory.
US benchmark ten-year Treasury notes fell 3/32 in price and were offering a yield of 5.10 percent, up two basis points on the day. Preventing further losses, investors remained worried the troubles surrounding two Bear Stearns hedge funds were not over.
Investors were also squaring positions ahead of Thursday's interest rate decision from the Federal Reserve. "Guys are already long the market in general and some of the curve steepening is coming off ahead of the Fed meeting tomorrow," said Tom Tucci, head Treasuries trader at RBC Capital Markets in New York.
Some believe that apart from leaving rates on hold, the US central bank will acknowledge the potential of further fallout from the subprime mortgage situation, which would benefit bonds.
But others have argued policy-makers will use the statement to wiggle their way out of a policy-box of their own creation - a commitment to getting inflation down to the presumed comfort range between 1-2 percent.
This camp says global inflation pressures could prevent the Fed from cutting rates even in the face of economic weakness as it guards against the threat of imported price growth.
Whatever the outcome, ongoing troubles with Bear Stearns' hedge funds could steal the show if any new information arises suggesting other big banks could be affected.
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