Treasurys Higher on Weak Manufacturing
(02-15) 08:00 PST New York (AP) —
Treasury prices rose Friday after the New York Federal Reserve reported that manufacturing in its region contracted this month.
The New York Fed’s Empire State index of factory activity plunged almost 21 points to a negative 11.7 reading, the weakest level in almost three years. Readings below zero show shrinkage. February also marked the fourth straight decline for the index. Economists had expected a much healthier reading of 5.75, according to Thomson/IFR.
The report helps build a case that the economy is on the brink of recession, although a recession requires two consecutive quarters of contraction and can only be declared in hindsight.
Although the data has negative portents for the economy, it is helpful to the Treasury market, as investors generally turn to government-backed bonds when they are worried about the economy.
In addition, the report puts extra pressure on the Fed to continue cutting interest rates. The central bank cut the overnight Fed funds rate by 1.25 percentage points in January. Fixed-income investors want to see more rate cuts to rejuvenate ailing debt markets.
The benchmark 10-year Treasury note rose 11/32 to 97-26/32 with a yield of 3.76 percent, down from 3.82 percent late Thursday, according to BGCantor Market Data. Prices and yields move in opposite directions.
The 30-year long bond gained 20/32 to 96 19/32 with a yield of 4.58 percent, down from 4.65 percent the day before.
The 2-year note ticked up 1/32 to 100 16/32 with a 1.87 percent yield, down from 1.90 percent late Thursday.
In other data news, the Fed said industrial output rose modestly last month, due to strength in the utility sector. Industrial production increased 0.1 percent in January, in line with December’s rise and analysts’ expectations.
Separately, the Labor Department reported that U.S. import prices rose 1.7 percent in January, as oil prices jumped. In December, prices slipped 0.2 percent.
Demand for Treasurys Thursday also was stoked by a complex barrage of negative developments elsewhere in the credit markets. Since the subprime issue first surfaced last summer, Treasurys have been the asset of choice for investors spooked by the unraveling of normally stalwart forms of debt assets.
This week saw turmoil in the market for short-term auction-rate munis when bidders could not be found for weekly notes offered by a number of top-rated local government issuers. There also are mounting problems in the leveraged loan market, as well as some ongoing weakness in corporate short-term commercial paper.
“In 25 years of working in this business, I don’t believe I have seen more market disruption from so many different sources,” said Kevin Giddis, managing director of fixed-income trading at Morgan Keegan.
The unusual degree of queasiness about debt issued by highly reliable companies and municipalities is linked to worries about bond insurers that unwisely backed subprime debt. There are concerns that they may not be able to shore up enough capital to withstand an expected avalanche of defaults.
One of the wobbly bond insurers, FGIC Co., agreed to be split into two separate entities. One would house its structured finance business where its troubled subprime assets are sheltered. The other would contain the municipal bonds that FGIC backs which normally are considered desirable.
New York State Insurance Superintendent Eric Dinallo lobbied for the rupture of FGIC and would like other insurers to follow suit. On Thursday FGIC lost its stellar “AAA” rating when Moody’s Investors Service downgraded it by two notches.
New York Governor Eliot Spitzer Thursday warned that the bond insurers are facing a potential break-up by state regulators and gave them just a few working days to line up necessary capital.
