Bonds sink on possible 30-year sale

[HenryTo]

This is definitely the news item of the day:
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Bonds sink on possible 30-year sale

GM news boosts 10-year note yields; Fed statement pushes dollar down against euro and yen.
May 4, 2005: 9:42 AM EDT

NEW YORK (CNN/Money) - Talk of renewed 30-year bond sales and news that investor Kirk Kerkorian made an offer for up to 28 million GM shares roiled the Treasury market Wednesday, with the long-term debt price plummeting more than 2 points.

Meanwhile, the dollar sunk to six week lows against the yen after the Federal Reserve said inflation was under control.

The 30-year bond sank 2-7/32 points to 111-10/32 to yield 4.62 percent, up from 4.52 percent late Tuesday.

The benchmark 10-year note fell 13/32 of a point to 98-7/32 to yield 4.22 percent, up from 4.19 percent. Bond prices and yields move in opposite directions.

The five-year note dipped 2/32 of a point to 100-17/32, yielding 3.88 percent, while the two-year note was unchanged at 99-31/32, yielding 3.64 percent.

Longer-dated debt plummeted after Assistant Secretary for Financial Markets Timothy Bitsberger said the Treasury would "examine if we have flexibility to issue 30-year bonds."

The last long-term debt sale happened Oct. 31, 2001, and tight supplies have kept the note relatively high

Given the size of the nation's deficits, traders concluded that a sale is in the works and sold off the 30-year in a flurry of trading.

The 10-year note also sank as stocks poised for a rally on news that investor Kirk Kerkorian had tendered an offer for up to 28 million shares in General Motors, (unchanged at $27.77, Research) which also sparked talk that Kerkorian might be out to shake up the struggling automaker and make it more profitable.

The news boosted equities, pulling money out of safe haven investments.

Bonds posted a short-lived rally after the Federal Reserve hiked rates as expected Tuesday, and surprised the market by correcting its policy statement to reintroduce a reassurance that long-term inflation expectations remained contained.

"The market is seeing a slowdown in the economy and figures the Fed can go slower as well," David Ader, an interest rate strategist at RBS Greenwich Capital, told Reuters.

But word from the Treasury and from GM has shaken the market -- which had priced in a series of steady, quarter-point rate hikes -- and investors will turn their attention to the April payrolls report due out Friday for guidance.

In currency trading, the euro traded at $1.2948, up from $1.2863 late Tuesday, while the dollar sank to ¥104.38 from ¥105.02.

The Federal Reserve Tuesday raised its key interest rate to 3 percent, the eighth quarter-point rise in eight meetings since last June, and in a corrected policy statement said that long-term inflation remained contained.

"The market got ambitious in what they were expecting from the Fed. The fact that the statement mentioned energy costs having some impact on consumer spending led some to be a bit cautious on the future growth outlook," Jeremy Stretch, senior market strategist at Rabobank, told Reuters.

That caution made it seem less likely that the Fed would increase the pace of its monetary tightening policy, which was a disappointment to currency traders. Higher interest rates generally help the dollar as they make dollar-denominated securities more attractive to foreign investors.

"The market is getting bulled up on the China angle once again and dollar/yen has followed that," Stretch added.

The yen gained strength on lingering talk that China would soon revalue its currency, a move that would likely spark a rally in Asian currencies, which are generally seen as undervalued.