16 May, 2008 |

Bond Prices Up On Weak Housing Data, Lowest Consumer Confidence Since 2005

Treasury debt prices rose Tuesday after data suggesting weaker economic growth supported investor expectations that the Federal Reserve would continue to cut benchmark interest rates.

Data released Tuesday showed a continued deterioration in the housing market, while consumer confidence fell to a two-year low. Also on Tuesday, two major retailers, Lowe’s and Target, issued warnings about earnings and September sales, respectively.

Gains were more pronounced in the shorter end of the Treasury curve, which has a higher sensitivity to changes in interest rates from the Fed.

The two-year Treasury note traded 3/32 higher in price for a yield of 4.00%, from 4.05% late Monday, while the benchmark 10-year note traded 2/32 higher in price for a yield of 4.63%, from 4.64% on Monday.

Data showed last month’s resales of U.S. homes fell a sharp 4.3% to an annualized rate of 5.50 million units, the National Association of Realtors said. Economists had expected an annual 5.49-million-unit pace.

While the drop in sales was not quite as strong as forecast, analysts were surprised that inventories of single-family homes and condos rose 0.4% to a 10-month supply and the highest since records began being kept in 1999.

In another report, home prices in the 10 largest U.S. cities fell 4.5% in July compared with a year earlier, the sharpest drop in 16 years, according to the S&P/Case-Shiller national home price index.

The bad news on the housing front appeared to be taking its toll on consumers. The Conference Board said its gauge of consumer confidence fell to 99.8 in September, the lowest since November 2005.

Fed fund futures suggest traders are pricing in a 90% chance the central bank will cut rates by 25 basis points at their Oct. 30-31 policy meeting, up from about a 72% chance late Monday.

The five-year note traded 6/32 higher in price for a yield of 4.27%, from 4.31% late Monday, while the 30-year bond traded 6/32 lower in price for a yield of 4.90%, from 4.89% on Monday.

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