Long-term Treasury prices closed with big losses yesterday as a host of problems caused investors to sell securities.
Dealers successfully negotiated the experimental single-price bidding procedures at the Treasury's two-year note auction, but the favorable response to the auction results was swamped by a bout of late selling.
The 30-year bond ended 13/8 points lower, where it yielded 7.46%. That is the highest closing yield on the long bond in almost a month.
The bond market began to sell off in overseas trading, as a big increase in German money supply suggested Germany would not ease monetary policy any time soon.
Traders said the renewed fluctuations in the currency markets was also disconcerting, with the French franc approaching the lower limit set by the European Exchange Rate Mechanism. Most of the volatility occurred in European currencies, but the dollar did move lower against the yen.
The market took another big slide in early New York trading when August housing starts jumped 10.4% to an annual rate of 1.237 million, well above the 1.15 million the market expected.
But analysts said a lot of the morning's sell-off reflected concerns about supply, as the market prepared to bid on $25 billion of short-term notes: the $14.5 billion of two-years sold yesterday and the $10.5 billion of five-years to be auctioned today.
Kathleen Camilli, chief economist at Maria Fiorini Ramirez Inc., said the abundance of new securities of supply was the market's biggest problem.
"Sentiment has shifted, the market is focusing on the supply of two-and five-year notes, as well as the continued issuance of corporate bonds, and on the idea that the Fed cannot ease anymore," she said.
Participants were especially wary of yesterday's auction because it was the Treasury's first attempt since 1974 to use a single-price bidding method.
And at the long end, traders were disappointed by the news that Argentina apparently will not buy the zero coupons it needs in the secondary market.
Wire services reported yesterday morning that Argentina's finance minister, Domingo Cavallo, said he expected to purchase the zero coupons needed to collateralize the country's $31 billion of debt reduction bonds directly from the Treasury.
By early in the New York session, the 30-year bond was almost a point lower. After that early sell-off, prices hovered near the lows as the market settled back to wait for the auction.
Analysts said the sale went reasonably well, and short-term prices staged a brief rally after the results were released.
Under the new system, all the two-years were sold at highest accepted yield. 4%. The issue will bear a 4% coupon. That compares with a 4%-4.02% market at the time bids were submitted.
The Treasury said the median, or mid-point, of the accepted bids was 3.98%, and the low bid was 3.93%.
Analysts said the change in procedures made it difficult to assess the auction. For example, the number of bids submitted was more than three times the size of the note issue. Usually that would show there had been strong interest in the issue, but economists questioned whether the number of bids had been affected by the new bidding method.
The results showed bidding had been more aggressive than the street expected, with dealers getting only 3% of the securities they bid for at the high of 4%.
After the auction, participants who missed getting securities tried to buy two-years in the secondary market, and the price of the new two-years rose, pushing the yield as low as 3.95%.
But the rally was derailed when sellers showed up near the close of futures trading.
Traders said there were big sellers of Treasury strips and 10-year notes. In addition to the report that Argentina would not be buying strips, participants speculated that Japanese investors may have been selling strips because of the dollar's move lower against the yen. Late yesterday, the dollar was quoted at 121.99 yen, down from 123.70 late Monday.
Some of the selling at the long end occurred as dealers put on curve-steepening trades, a bond trader said.
A coupon trader said that even though the economic fundamentals were attractive, the market was in bad shape technically. He said he expects the long bond to test the 71/2% yield.
But the bond trader said the market had overreacted yesterday and the current levels represented a buying opportunity. "It was just a lot of hysteria, a lot of people thinking someone knew what was going on," he said, but admitted that his was the minority position.
Michael Moran, chief economist at Daiwa Securities America, said he thought worries about politics were another important factor.
"My suspicion is that it's concern about the election and a Clinton presidency that's wearing on the market now," Mr. Moran said.
He cited an ABC-Washington Post poll released yesterday that showed Democratic presidential candidate Bill Clinton was leading President Bush 58% to 37%, a startlingly strong 21-point advantage.
Although Treasury prices reacted negatively to yesterday morning's housing report, analysts said the starts data were not as impressive as they appeared on the surface.
Sally Kleinman, a financial markets analyst at Chemical Securities Inc., said starts had been held down in July by bad weather, and the jump in August represented a bounce back. July's decline in starts was revised to 2.4% from the 2.8% reported last month.
Averaging the two months results in an annual rate of 1.18 million," which is a respectable pace, but still does not bring you back to the strength in the beginning of the year," she said. Starts posted a 1.34 million rate in March.
Other analysts said the decline in August permits to a 1.063 million rate, from 1.08 million in July, cast doubt on the increase in starts.
"Permits were down, and that's the leading indicator," said Bob Dieli, a business economist at Northern Trust Co. in Chicago. "When you look at permits, there's nothing to indicate we're going to be able to sustain that level" of starts.
Treasury traders said a couple of pieces of news released yesterday afternoon looked favorable for the market but had no impact on prices.
The August Treasury budget deficit totaled only $24.7 billion, when the market was expecting a $32 billion gap. And the Johnson Redbook survey of department store sales showed a 0.8% rise in sales for the first three weeks of July, down from the 1.5% gain after the first two weeks.
The December bond futures contract closed 12/32 lower at 1048/32.
In the cash market, the 71/4% 30-year bond was 1 11/32 lower, at 97 11/32-97 15/32, to yield 7.46%.
The 63/8% 10-year note fell 5/8, to 99 1/32-99 5/32, to yield 6.49%.
The three-year 45/8% note was down 6/32, at 100 13/32-100 15/32, to yield 4.44%.
In when-issued trading, the new 4% two-year note was bid at 4% and the five-year note to be auctioned today was bid at 5.54%.
Treasury Market Yields
Prev. Prev.
Tuedsay Week Month
3-Month Bill 2.97 2.97 3.23
6-Month Bill 3.02 3.00 3.35
1-Year Bill 3.18 3.15 3.54
2-Year Note 3.92 3.84 4.28
3-Year Note 4.44 4.35 4.84
5-Year Note 5.50 5.34 5.73
7-Year Note 6.03 5.86 6.26
10-Year Note 6.49 6.37 6.72
30-Year Bond 7.46 7.31 7.47
Source: Cantor, Fitzgerald/Telerate
