With the excitement of a Federal Open Market Committee meeting and $99 billion in new debt sales over for the week, the narrow range for US Treasury yields is coming back into focus. It is a range that has proved quite difficult to break.
Neither questions over whether the Federal Reserve would see its current monetary stimulus program to completion nor anxiety about the approaching US debt ceiling have been enough to burst the narrow bounds in which yields have been stuck for the past two months.
Traders believe it would take a drastic improvement in the labour market or an unforeseen disaster such as a US credit ratings downgrade or other debt event to break the spell. Treasury yields rose about 100 basis points from lows they hit in the fall as anticipation of the Fed's announcement of another easing program spurred traders to pile into long Treasury bets.
Once the $600 billion Treasury purchase program was officially announced, however, the market sold off with a momentum that spooked many Treasury investors. But that excitement, too, is over. A poll of the 18 US primary dealers, the investment firms chosen to deal directly with the Fed and Treasury to carry out monetary policy and auctions, revealed expectations that the 10-year Treasury yield would remain largely rooted in place into the middle of 2011.
Rick Klingman, managing director of Treasury trading at BNP Paribas, said Treasuries won't move definitively until the unemployment rate drops. That would signal to Treasury traders that the Fed's first monetary tightening move was imminent.
A drop in the unemployment rate to 9 percent or 8.8 percent, Klingman said, would do the trick. "To me the unemployment rate's the key factor to getting us out of the range," he added. The benchmark 10-year note yield isn't likely on Friday to stray from its bounds of between 3.25 percent at the low end and 3.50 percent at the high end, traders said on Thursday.
"We may limp into the close tomorrow, with a very quiet trade," said Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore. The main data release, advance fourth-quarter GDP, could cause a brief bout of activity, Mitchell said, but its effects on the market would likely not last.
Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson in Seattle, said she thought the Fed should be acknowledging the mixed nature of the recent economic data. "The improvement in the economy has been driven all by fiscal and monetary stimulus; it hasn't been driven by real growth from the consumer," she said. "To me that's just a major, major negative for economic activity going forward. We need to have growth that's based on real growth, not just based on some temporary stimulus measures."
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