Treasuries Sink As Rate Cut Hopes Ease

U.S. Treasuries plunged for a fifth straight day on Monday as rising optimism the economy will recover later this year led dealers to lower expectations for swift and deep Federal Reserve interest rate cuts.

``People are beginning to sense the world is a much safer place,'' said Thomas Estes, head of fixed-income sales and trading at Daiwa Securities Inc.

Treasury yields, which move in the opposite direction to prices, flew sharply higher last week as a stock market rally helped douse speculation the Fed will slash rates for a fourth time this year well before its May 15 policy meeting.

``Fed speakers have made it very clear they expect the economy to be better in the second half of the year and they have front-loaded their interest rate cuts,'' said Bill Hornbarger, chief fixed-income strategist at A.G. Edwards & Sons in St. Louis.

Bond prices extended their freefall on Monday even as equity markets retreated slightly and despite poor economic reports showing rising jobless claims, a drop in retail sales and sliding consumer confidence.

While the most recent economic numbers gave little concrete evidence that the faltering economy is stabilizing, investors are nonetheless showing a stronger appetite for risk.

``You are beginning to see a rotation out of Treasuries and into higher credits,'' Estes said. ``The mentality is that people are putting money to work and can't afford to miss the move.''

The bond market's move down has been rapid and violent.

Benchmark 10-year note yields have soared 39 basis points (0.39 percentage point) in a week, and are now 17 basis points higher than at the outset of the year, before three half-point Fed interest rate cuts to kick-start flagging economic growth.

Dealers said volumes were light as many fixed-income accounts kept to the sidelines following the three-day Easter weekend, and that light activity may have exaggerated Monday's moves.

At the 3 p.m. settlement, two-year Treasury notes were 6/32 lower at 99-18/32, pushing their yield up to 4.49 percent — just half a point below the Fed's 5.0 percent federal funds rate, and up from 2-1/2 lows below 4.10 percent seen early this month.

Five-year notes were 19/32 lower at 103-13/32, yielding 4.91 percent. Benchmark 10-year notes fell 31/32 to 97-25/32, yielding 5.29 percent.

Thirty-year bonds were off 1-10/32 at 95-11/32 to yield 5.70 percent.

Investors will be closely watching a slew of earnings reports this week for signs of how well Corporate America is grappling with a sharp economic slowdown, which for most of this year has supported short-dated Treasuries on expectations for lower interest rates.

``The positive for bonds that will keep yields from going much higher — and, in fact, will probably provide another buying opportunity — is that the economy is still pretty slow,'' said David Horner, senior financial strategist at Merrill Lynch.

Last week, stocks flew higher, rounding out the second best weekly percentage gain for the battered technology-weighted Nasdaq Composite index since its birth in 1971.

By late Monday afternoon, the Nasdaq slid 3.4 percent, while the Dow Jones industrial average was off 0.7 percent.

On Tuesday, the government will release consumer price inflation data for March at 8:30 a.m. Economists polled by Reuters expect the rate to have inched up by 0.1 percent, with the core rate, excluding volatile food and energy prices, seen rising 0.2 percent.

The market will also see data on housing starts, real earnings and industrial production data. Economists expect production to have contracted by 0.1 percent versus a fall of 0.6 percent in February.

Separately, the Treasury on Monday sold $9 billion in three-month bills at a high rate of 4.05 percent, and $8 billion in six-month bills at a high rate of 4.06 percent.