The Wall Street Journal-20080130-Economic-Strength Data- Stock Gains Damp Treasurys
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Economic-Strength Data, Stock Gains Damp Treasurys
Full Text (822 words)Treasury bond prices ended lower after a key economic report showed an unusual amount of strength, and stock markets marked a positive day.
The two-year note, the most sensitive to interest-rate changes, fell 5/32 point, or $1.5625 per $1,000 face value, to yield 2.274%. The benchmark 10-year note was down 20/32 point to yield 3.658%. That is up from 3.585%, as yields rise when prices fall.
The robust durable-goods-order report didn't drive a rethink of the size of the rate cut the Federal Reserve is likely to deliver today -- most expect Fed Chairman Ben Bernanke and his central-bank colleagues to cut rates by half a percentage point to 3%. But the report called into question some of the more ominous views surrounding the economic outlook. Losses in Treasurys were steady and spread across the maturity spectrum, although the market managed to rebound a touch around midday and close off the lows.
"These orders...breathe lifeblood into U.S. industry," said Ken Mayland, chief economist with ClearView Economics. "There is plenty of new work to do in upcoming months for American industry."
Joseph Di Censo, fixed-income strategist in New York at Lehman Brothers, said "a small confirmation from durable goods that not every sector of the economy is falling will put a second doubt on the recession thesis." He added, "Stability has come back to the market, and you are seeing it give up some of the sweeping flight-to-quality flow last week." Mr. Di Censo said he expects the two-year yield to bounce back to 2.7% by the end of this year and the 10-year yield to climb back up to 4.2%-4.3% over the same period.
The forces leaning against Treasurys also wounded the government's sale of $14 billion in five-year notes. The issue yielded 2.909% at Tuesday's sale, compared with the 2.895% level seen on the security just before the 1 p.m. EST bidding deadline.
Treasury auctions are frequently made or broken by the willingness of large, nondealer investors to buy -- the so-called "indirect bid." It was no different this time around, with the indirect bid coming in at a paltry 21.2%, versus the 25.3% that was average of the past eight sales.
RBS Greenwich interest-rate strategist Ian Lyngen noted the indirect bid was the lowest since July of last year. "The market was trading much lower into the auction, and has since extended that trend postauction -- in line with the modest indirect interest," he said.
AUCTION RESULTS
FOUR-WEEK BILLS
Here are the results of yesterday's Treasury auctions. All bids are awarded
at a single price at the market-clearing yield. Rates are determined by the
difference between that price and the face value.
Applications ..................................... $60,366,594,000
Accepted bids .................................... $20,000,024,000
Accepted noncompetitively ........................ $251,494,000
Foreign noncompetitively ......................... $887,100,000
Auction price (rate) ............................. 99.840556 (2.050%)
Coupon equivalent ................................ 2.087%
Bids at market-clearing yld accepted ............. 38.53%
Cusip number ..................................... 912795C90
The bills are dated Jan. 31 and mature Feb. 28.
FIVE-YEAR NOTES
Applications ..................................... $30,170,421,000
Accepted bids .................................... $14,000,008,000
Bids at market-clearing yield accepted ........... 57.39%
Accepted noncompetitively ........................ $81,379,000
" foreign noncompetitively ....................... $25,000,000
Auction price (rate) ............................. 99.842844 (2.909%)
Interest rate .................................... 2.875%
CUSIP Number ..................................... 912828HQ6
The notes are dated Jan. 31 and mature Jan. 31, 2013. Harrah's LBO Loans
Draw Weak Response
A portion of Harrah's Entertainment Inc.'s leveraged-buyout loans traded yesterday, but demand proved lackluster as investors shied away from the debt just as they did with the casino operator's bonds the day before.
The prices of loans were quoted in the secondary market, where such debt is traded, at a steep discount of up to nine cents.
Only a portion of Harrah's total $7.25 billion of loans was trading, according to market participants who weren't able to pinpoint exactly how much was unloaded into the market.
Such poor reception for a deal that has been in the pipeline for months is another blow for the leveraged-finance underwriting community, which has been saddled with some $160 billion of debt -- mostly for heavily indebted LBOs -- that has been nearly impossible to unload since the credit crunch began last summer.
And the way Harrah's deal sold defied recent precedent and shows just how desperate some banks are to offload debt.
Credit Suisse Group, which had been part of the original underwriting group for the loan offering, told the other banks that it wouldn't be selling its $1 billion of loans as part of the broader marketing effort.
The other underwriters, led by Banc of America Securities and Deutsche Bank AG, couldn't find enough investors for the $3 billion of loans they were attempting to sell, according to a person close to the situation. The loan offering has been postponed, according to another person close to the deal.
Unable to find willing buyers, some banks yesterday dumped some of that debt into the secondary market at much lower prices than they initially had hoped for.
-- Cynthia Koons
