Fed official hints at weaker dollar as Treasury secretary talks up strong dollar

Section:

Treasuries Lower Following 'Ugly' Auction

By Wayne Cole
Reuters
Thursday, September 9, 2004
http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=6195998

NEW YORK -- Treasuries prices turned lower
in choppy trade on Thursday as an auction of
U.S. government debt drew almost no private
demand, leaving the dealer community holding
a pile of paper.

"It was an extremely ugly auction. And that's
something nobody wants to see, not the Street
and certainly not Treasury given the amount of
borrowing they have to do," said Sadakichi
Robbins, head of global fixed-income trading
at Bank Julius Baer.

The sale of $9 billion in reopened 10-year
Treasury notes went at a high yield of 4.195
percent, well above expectations, and drew bids
for only 2.12 times the amount on offer, down
from August's 2.90 level.

The current 10-year note shed 6/32 in price,
lifting its yield to 4.19 percent from 4.16
percent on Wednesday. In when-issued trading,
yields on the new 10-year paper had hovered
around 4.17 percent before the sale.

Indirect bidders, including customers of primary
dealers and foreign central banks, picked up only
2.8 percent of the issue. That compares to 54
percent in the original sale of the notes and 38
percent at the last reopening.

Primary dealers took $8.65 billion of the issue,
or nearly all of it while direct bidders took only
$61 million in a return to more typical levels after
the huge bidding increase seen at Wednesday's
five-year sale.

"The real surprise is that none of the usual
indirect bidders turned up," said Robbins. "Maybe
they were scared away by the jump in direct
bidding (Wednesday) though they were going
to get sucked in to paying more than they
wanted."

Direct bidders bought 32 percent of the five-year
sale, a complete surprise to traders since they
usually only take 1 percent to 2 percent.

With dealers now stuck with an excess of 10-year
paper, analysts said there was a risk they would
seek to sell it off quickly to avoid even larger losses.

The danger depressed the rest of the market, with
the two-year note easing 1/32. Its yield rose to 2.49
percent from 2.48 percent. The 30-year bond lost
15/32, taking yields to 4.98 percent from 4.96
percent.

The new five-year notes lost most of their early
gains to yield 3.41 percent, just down from the
3.439 percent achieved at Wednesday's auction.

Bonds had dipped early when a surprisingly sharp
44,000 drop in weekly initial jobless claims sparked
about of profit-taking. But analysts saw little import
in the series as it has been distorted by seasonal
adjustment problems and hurricanes in recent weeks.

"Hurricanes come and hurricanes go," said Ram
Bhagavatula, chief economist at RBS Financial
Markets. "Setting aside the weather, we still think
the labor market is improving and payrolls should
rise around 165,000 this month."

Other data showed import prices jumped 1.7 percent
in July largely due to a huge rise in petroleum costs
while consumer goods prices were unchanged.

Bhagavatula, however, noted that excluding
petroleum, import prices were up a not
inconsiderable 3.2 percent on the year. "Perhaps
Greenspan was a bit premature in calling the
inflation threat over," he said.

On Wednesday, Federal Reserve Chairman Alan
Greenspan told Congress the economy had
"regained some traction" and observed that
inflation -- and inflation expectations -- had
eased.

The market still fully expects the Fed to hike
rates at its meeting on Sept. 21, but the comments
led to speculation it may pause after that.

But Bhagavatula thinks the Fed will hike rates at
every remaining meeting this year, taking rates to
2.25 percent in time for Christmas.

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