NEW YORK (CNNfn) - Treasury bonds shrank from corporate competition Wednesday, waking up from lingering Greenspan euphoria to confront a massive corporate offering that could flood the market with unwelcome supply.
As a result, by 3:00 p.m., the supply jitters had driven the benchmark 30-year Treasury bond down 12/32 of a point in price to 95-16/32. The yield, which moves in the opposite direction, climbed to 5.56 percent.
Analysts said the era of good feelings inspired by Federal Reserve Chairman Alan Greenspan's "no inflation" comments Tuesday had proved short-lived, fading by mid-day.
In its place, traders stared down the barrel of several huge corporate deals that threaten to compete with Treasury bonds at higher yields, taking a bite out of already-shaky demand.
"You see some selling of other issues of comparable maturities as people try to make room in their portfolios for the pending issue," said Marion Boucher Soper, fixed-income analyst at Bear Stearns. "So spreads typically widen in advance, and we should see that in the next week."
AT&T in particular stunned the bond market by announcing a corporate offering that could grow to $8 billion by the time it prices March 24. If the offering grows as traders have speculated, it would be the largest corporate float ever, dwarfing such commonplace deals as Lucent's Wednesday pricing of $1.36 billion in debt.
Treasury traders said the market has still not recovered from last month's $35 billion quarterly refunding auctions, which drew lackluster retail response and so left the bulk of the fresh supply in the hands of large dealers.
Dollar's flight adds to gloom
"Supply is weighing on the market," said Scott Graham, co-head of government bond trading at Prudential Securities, noting that a weaker dollar had also contributed to the bond market pullback by sparking some liquidation of overseas accounts.
The dollar had reacted poorly to Greenspan's comments Tuesday and extended its slide versus both yen and euro, falling past the 120 yen barrier for the first time this month.
By 3:00 p.m. ET, the dollar had fallen to 119.83 yen, down more than a full yen from its previous close of 121.09. The losses now complete the dollar's recent journey backward, erasing all the gains made after the Bank of Japan effectively reduced a key Japanese interest rate to zero.
Since then, a two-day rally in Tokyo stocks has resurrected confidence in the capability of the Japanese economy to pull itself out of recession, calling the yen buyers back out of hiding.
In addition, the traditional yen repatriation season is now fully underway, spurring additional yen demand. March ends the Japanese fiscal year, leading many investors to park their capital in yen-denominated securities for bookkeeping purposes.
The euro took advantage of the dollar's weakness, climbing nearly an entire cent to $1.0952 from its previous close of $1.0881. Speculation that Europe could be teetering into a recession seemed mostly quelled, curbing the 10-week-old currency's drift into record lows.
Fundamentals still intact
Despite these mostly technical factors, perceptive Treasury traders said that the underlying economic outlook is still good for bonds.
A growing economy ordinarily begins to generate inflationary pressures, in turn goading the Federal Open Monetary Committee (FOMC) to raise interest rates. Higher interest rates erode demand for fixed-income securities like bonds, lowering prices and driving up yields.
However, a barrage of indications ranging from the consumer price index to Tuesday's high productivity figures have driven the bond bears back into hiding, crushing fears of an interest rate hike in the near future.
"I think long-terms are probably headed under 5-1/2 percent," said Peter Cardillo, stock analyst at Westfalia Investments. "When will that come? As soon as we get the release of the PPI and the consumers price index."
The Labor Department will release the February producer price index (PPI), a key indicator of inflationary forces at work in the economy, Friday morning. Economists predict the statistics will show that the price of creating goods and services actually declined 0.1 percent in the month, a dramatic drop from January's already-mild 0.5 percent increase.
Cardillo is slightly less optimistic, but still sees inflation declining.
"I think we'll see the jump that we had last month -- 0.5 percent -- come in at 0.2 percent (for February) with the core rate up 0.1 percent," he said.
"The PPI jumps in the first two months of the new year due to seasonal factors. You have bad weather so you have vegetable prices going up and of course, during that particular time, oil prices were actually going lower. . . . So I think this PPI number will confirm that there is no inflation."
Bear Stearns' Soper agrees with Cardillo that yields should edge lower in the next few weeks, saying that her macro view "would be slightly down to flat." 
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