Treasury Debt Prices Extend Losses

November 02, 2004
By Pedro Nicolaci da Costa
MSN Money

NEW YORK (Reuters) - Treasury debt prices extended losses late on Tuesday as early election results showing Democratic challenger John Kerry trailing President Bush encouraged stock futures.

Bonds were mostly taking their cue from stock futures (SPZ4), which were rallying on the possibility that Bush might get another four years in the White House.

Bush's profit-friendly tax cuts are viewed by many as a boon to equities and thus bad for safe-haven bonds.

"Kerry hasn't really been able to do anything to cross over into any of the Bush states," said J.P. Marra, managing director of government bond trading at Lehman Brothers. "The bond market's move is more just a reaction to what stocks would do."

Analysts warned, however, that two of the key states that were expected to decide the outcome of the vote -- Ohio and Florida -- were still up for grabs. Pennsylvania is being projected as going to Kerry.

As the votes trickled in, the benchmark 10-year (US10YT-RR) note fell 12/32 for a yield of 4.10 percent from 4.08 percent on Monday.

The lack of any major glitches so far in the electoral process was also a negative for bonds.

Expectations of a repeat of the prolonged 2000 election dispute have so broadly permeated the market that some investors worried a smooth conclusion to this year's vote would fuel a sell-off in Treasuries.

"If we come in tomorrow morning knowing who won, the market will probably move lower," said Mark Mahoney, Treasury market strategist at UBS.

Trading would continue until 1 a.m. (0600 GMT) as recommended by the Bond Market Association, although investors said desks were thinly staffed.

Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co., said a recent bias in favor of fixed-income was closely linked to election concerns, and would thus be unwound as the electoral dust settles.

But defiant bond bulls countered that shaky economic fundamentals also underpinned the Treasury market's success, and those factors were unlikely to go away soon.

On Friday, investors will get a look at how the labor market fared during October and forecasts vary widely.

Subdued job growth has fueled speculation that the Federal Reserve could slow the pace of interest rate hikes as it waits for evidence of a rebound in employment.

Volatile energy markets have further muddied the economic outlook, giving bonds another incentive to hold current yield levels. Last week, 10-year yields hit a seven-month low of 3.93 percent.

Late on Tuesday oil held below $50 a barrel, offering little help to Treasuries. Investors have tended to look at high crude costs largely as a future tax on U.S. consumption, rather than a harbinger of inflation, and thus a boon to government debt.

Tuesday evening the two-year Treasury note (US2YT-RR) was down 2/32 for a yield of 2.61 percent. The five-year note(US5YT-RR) lost 7/32, sending its yield to 3.36 percent from 3.34 percent. The 30-year bond (US30YT-RR) dropped 19/32, leaving yields at 4.85 percent.

Among the scattering of secondary data released on Tuesday, were reports on weekly chain store sales that suggested the fourth quarter was off to a sluggish start.

The ICSC/UBS survey of sales reported a third weekly decline, taking annual growth to 2.9 percent from 3.7 percent. The Redbook survey reported sales growth ticked up to a still modest 3.2 percent from 3.1 percent.




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