The Treasury market gave another exhibition of its current strength yesterday when most prices managed to end higher despite a midday sell-off on auction jitters.
Late yesterday, the 30-year bond was up more than 1/2 point and yielded 7.31%. while short-term notes were unchanged to 1/2 point higher.
Analysts said the Treasury's auction of $15 billion of three-year notes, the first of this week's three refunding auctions, encountered lackluster demand. The results were especially disappointing given the market's high hopes earlier in the day, they said.
But a few pieces of favorable news helped the market bounce back from the lows it reached after the auction results were announced.
The news that helped Treasury prices included a report of weak department store sales in carly August and the Commodity Research Bureau index's break below 200.
The market's bounce off its lows "just shows the bullish tone, " said Astrid Adolfson, an economist at McCarthy, Crisanti & Maffei Inc. "They were expecting so much out of the three-year and it turned out to be an average auction, yet the market was able to run so much after that."
Ms. Adolfson said the market's gains yesterday afternoon were noteworthy considering that today's 10-year note sale and tomorrow's 30-year bond auction are considered harder sells than the three-year sale.
The pricing on the $15 billion of three-year notes matched what the market expected at auction time: The average yield was 4.69% and 27% of the notes were awarded at the high of 4.70%.
The issue, which will bear a 4 5/8% coupon, was the lowest yielding three-year since the Treasury began auctioning the maturity in 1978.
But analysts said the details of the results showed the demand for the notes was not that strong.
Bids totaled only $34.2 billion, or 2.28 bids for each security being auctioned, when the average for three-year sales is about 2.7 bids. Noncompetitive bids fell to $807 million from $1.007 billion at the last three-year sale in May.
"The auction results were lackluster in terms of the amount of coverage and noncompetitive tenders," said Douglas Schindewolf, an economist at Smith Barney, Harris Upham & Co. "It looks as if the Street was left holding the bag."
Treasury prices rallied yesterday morning and gave back those gains ahead of the bidding deadline, then moved into negative territory after the auction results were announced.
But the market did not stay at the lows for long.
One factor that boosted prices was the CRB index's break through the 200 level. The index, which has made new six-year lows each of the last three trading sessions. had hovered just above 200 all morning yesterday, but traders said the move below that level.had a psychological impact on the bond market.
The CRB index closed 1.83 points lower at 199.89.
A coupon trader said participants at the long ends also liked Reutersts story suggesting worries about the Argentine debt reduction deal have been overblown. Last week there was talk that so many banks were choosing par bonds, rather than discount bonds, that Argentina might not have enough money to do the deal. Treasury traders are interested because Argentina will buy Treasury Strips as collateral for its debt reduction bonds.
In the Reuters story, Citicorp Vice Chairman William Rhodes said the preference for par bonds would not be a problem. Mr. Rhodes said Argentina and its creditors will sign a debt accord on Sept. 18.
The bond market's last move higher, right before the close of the futures market, occurred because the, Johnson Redbook sais department store sales in the first week of August were down 2.7% from the levels in July, traders said. Analysts warned, though, that the weekly Johnson Redbook numbers are quite volatile.
The new three-years improved along with the rest of the market during the afternoon and were quoted late yesterday at 4.66%, down from the auction average of 4.69%.
There was a lot of excitement in other markets yesterday, and some of it had an impact on Treasury trading.
Overnight in Japan, the Nikkei index of stock prices dropped 243.78 points and closed at 14.822.56. breaking below the 15,000 support level.
A London dealer said the drop in Japanese stocks and the subsequent declines in European stock markets "underlined the wisdom of not having all your investments in equities."
In early New York trading, a bevy of central banks intervened three times in the foreign exchange market in support of the dollar.
Traders were divided on what the intervention meant for the bond market. The defense of the dollar should be reassuring to foreign investors, but participants had not been expecting that much foreign buying at the refunding anyway. And some traders argued that the Federal Reserve's apparent concern about the dollar meant it would be less likely to ease monetary policy in the near future.
The September bond futures contract closed 14/32 higher at 106 23/32.
In the cash market, the 30-year 8% bond was 18/32 higher, at 108 3/32-108 7/32, to yield 7.31 %.
The 7 1/2% 10-year note rose 9/32, to 107 11/32-107 15/32, to yield 6.45%.
The three-year 5 7/8% note was unchanged, at 103 12/32-103 14/32, to yield 4.53%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 3.13%, the six-month bill up one basis point at 3.21%, and the year bill steady at 3.29%.
In when-issued trading, the 10-year notes were bid at 6.45% and the 30-year bonds were bid at 7.27%.
