Bond market cools as profit-taking emerges

By Emily Flitter

NEW YORK (BestGrowthStock) – The U.S. government debt market cooled a bit on Tuesday, as traders booked profits after a Monday rally that sent longer-dated yields to their lowest in nearly a year and a half.

The sell-off coincided with the Federal Reserve’s first open market purchase of Treasuries since late October in a bid to jump-start the economy.

The U.S. central bank, using the proceeds of its mortgage bond holdings, bought $2.55 billion of government debt maturing in 2014 and 2016.

But analysts said the Treasuries’ sell-off on good volume was driven mainly by brighter earnings news from Europe, stronger U.S. stocks (Read more about the stock market today. ), and economic data showing producer price increases. The producer price index for July assuaged some worries that prices were starting to actually drop.

“The core number was up more, so the talk of deflation is a little premature,” said David Coard, head of fixed income sales and trading at Williams Capital Group in New York.

These reports gave some traders a reason to cash in on a bond market, which is seen as overbought. Ten-year and 30-year yields hit lows not seen since March and April 2009.

Many bond exchange-traded funds were trading far above their recent averages with some as much as three times their 50-day moving averages, according to Bespoke Investment Group.

Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore said Tuesday’s activity was being driven by “more speculative longs just kind of taking profits and moving to the sidelines.”

Prices soared and yields plummeted over the past week, as Treasury investors rushed into the market ahead of the Fed’s restoration of its Treasury purchase program.

“It’s more of a sell-the-tape type trade going on now,” Mitchell said.

The benchmark 10-year note traded 21/32 lower in price to yield 2.65 percent, up from 2.57 percent at Monday’s close.

Thirty-year Treasuries shed about 1 point to yield 3.76 percent, up 3.72 percent late on Monday.

The market paused briefly ahead of U.S. inflation and housing data on Tuesday morning, but continued its slide after the data’s release. July housing starts rose less than expected, but building permits fell to their lowest level in over a year.

Producer prices rose for the first time in four months.

William Larkin, a fixed-income portfolio manager in Salem, Massachusetts, said some of Tuesday’s selling could also be attributed to growing anxiety among Treasury traders that a wave of mortgage refinancings is coming, now that Treasury yields are so low.

“We’ve seen that refinancing in corporates,” Larkin said.

Refinancing could lead to the selling of longer-dated Treasuries by mortgage servicers trying to rebalance their portfolios after customers repaid their loans more quickly than expected.

(Additional reporting by Richard Leong; Editing by Diane Craft)

Bond market cools as profit-taking emerges