Treasury prices drop as stocks gain
NEW YORK – Treasury prices dropped Wednesday as the stock market ran up a second straight day of gains, spurred by a Federal Reserve official’s hint that more rate cuts may be in store.
Fed Vice Chairman Donald Kohn said in a speech Tuesday that recent havoc in the financial markets has undone some of the economic improvement seen in previous weeks and that households and businesses could face problems getting credit. These problems could merit what Kohn called “offsetting” policy from the Fed.
The prospect of another rate cut – the Fed reduced its fed funds target by a total of 0.75 percentage points this fall – led Wall Street to extend its sharp advance for a second day. The Dow Jones industrial average closed up more than 330 points.
Kevin Giddis, managing director of fixed income at Morgan Keegan, said that “a relative calm has entered the bond and stock markets for a second day in a row.”
“While some may think it is safe to go back into the water, I remain cautious,” he said in a reference to the stock market, pointing out that confidence and liquidity problems in credit markets had weighed on stocks as recently as Monday.
At the same time, several developments this week have lifted hopes that there will finally be some relief for banks stung by bad mortgages and other credit problems.
On Wednesday the New York Fed, as promised, executed an unusually long six-week $8 billion repurchase agreement that allowed banks to exchange mortgage-backed securities for Treasurys and square their books by the end of the year. This follows Tuesday’s news that the Abu Dhabi Investment Authority will inject $7.5 billion in embattled Citigroup Inc.
The benchmark 10-year Treasury note fell 19/32 to 101 27/32 with a yield of 4.02 percent, up from 3.95 percent late Tuesday. Prices and yields move in opposite directions.
The 30-year long bond fell 25/32 to 109 24/32 with a yield of 4.41 percent, up from 4.36 percent late Tuesday.
The two-year note fell 7/32 to 100 25/32 with a yield of 3.20 percent, up from 3.08 percent.
Additional selling in after-hours trade pushed the benchmark yield up to 4.05 percent from 4.02 percent at the 3 p.m. EST close, and also lifted the 30-year yield to 4.43 percent from 4.41 percent. But the two-year yield edged down to 3.19 percent from 3.20 percent.
The three-month yield dropped to 3.04 percent from 3.11 percent Tuesday and the discount rate dropped to 2.97 percent from 3.11 percent.
An afternoon auction of $20 billion in new two-year notes did not have strong domestic or foreign demand, but that appeared to have little impact on trade.