US Treasuries dip as Hurricane Rita eyed warily

Thu Sep 22, 2005 01:18 PM ET
By Chris Reese

NEW YORK, Sept 22 (Reuters) - U.S. Treasury debt prices eased slightly on Thursday in a pullback from Wednesday's gains as traders waited to see the extent of damage to energy facilities that could come from powerful Hurricane Rita.

The market posted strong gains on Wednesday, following crude oil prices higher as Rita churned through the Gulf of Mexico on course to disrupt energy production and refining facilities along the Texas coast.

Higher energy costs could slow the economy, a prospect that generally supports Treasuries.
"We had a big boost (Wednesday) and today people are really just staying out of the way. They don't want to get involved in the curve trades and are just waiting to see what path the hurricane takes," said Mary Ann Hurley, a trader with D.A. Davidson & Co. in Seattle.

"People want to see what impact Rita will have on the oil infrastructure, how many people are displaced, and if that is going to impact consumer spending," she said.

While investors followed the path of the Category 5 hurricane toward Texas and the heart of U.S. oil refining capacity, the bond market gave back some of the previous day's price gains.

U.S. benchmark 10-year Treasury notes (US10YT=RR: Quote, Profile, Research) eased 2/32 for a yield of 4.18 percent, up a tick from 4.17 percent on Wednesday.

About 25 percent of U.S. oil refining capacity is in Texas, and Rita threatens to batter oil and natural gas infrastructure that has already been damaged by Hurricane Katrina.

"The fear is that what happened with Katrina could happen with Rita," said Andy Brenner, head of institutional fixed-income at Investec US. "We doubt that will be the case, but weather will be the determining factor in the short-term price of energy, hence the short term direction of bonds."

Oil prices moved higher on Thursday, trading around $67.00 per barrel. Economists fear the high energy prices will take a toll on consumer spending, especially once the winter season kicks in and fuel oil and natural gas bills jump.

"We are looking at possibly a really bad situation economically," said Michael Franzese, head of Treasury trading at Zions Bank Capital Markets. "Energy supply is really going to start putting a drag on this economy -- the consumer's pocket book is definitely being affected."

If the U.S. economy is slowed enough by the impact of Rita and Katrina, the Federal Reserve may have to reconsider its campaign of monetary tightening. The Fed raised interest rates by a quarter-percentage point on Tuesday, but acknowledged that Katrina would at least have a short-term impact on the economy.
"We gave them the benefit of the doubt when it came to Katrina, but this marketplace cannot see rising rates in the face of another natural disaster," Franzese said.

The bond market largely shrugged off data showing U.S. jobless claims rose to 432,000 in the week ended Sept. 17 from a revised 424,000 in the prior week. On average, economists had been looking for an increase of 440,000 last week.

Jobless claims related to Hurricane Katrina totaled 103,000 in the latest week, the Labor Department said.
Two-year notes (US2YT=RR: Quote, Profile, Research) were unchanged with a yield of 3.92 percent, while five-year notes (US5YT=RR: Quote, Profile, Research) lost 1/32 with its yield steady at 3.99 percent.
The 30-year bond (US30YT=RR: Quote, Profile, Research) lost 10/32 for a yield 4.47 percent from 4.46 percent on Wednesday.

In other data on Thursday, the Conference Board said its index of leading, coincident and lagging indicators fell 0.2 percent in August from a decline of 0.1 percent in July.

The Federal Reserve Bank of Chicago said its gauge of the national economy fell in August, with its National Activity Index slipping to 0.10 from an upwardly revised 0.28 in July.