The market experienced some sticker shock yesterday as signs of higher prices in the economy brought sellers back to town.
The 30-year bond ended down 26/32, to yield 6.20%.
A modest increase in consumer prices and a surge in commodity prices put players on the defensive throughout a session characterized by sporadic thrusts of selling.
The market sold off through the morning and made a half-hearted attempt to recover at midday. But lackluster demand at the Treasury Department's 10-year note auction brought sellers back into the market. The disappointing note sale contributed to the poor performance, but the real focus was inflation.
The Labor Department reported that the October consumer price index rose 0.4% overall, and 0.3% excluding food and energy. The reading of the CPI report was in sharp contrast to Tuesday's producer price index, which fell last month.
Commodities also posed problems for the market. The Commodity Research Bureau's index of commodity prices surged 3 1/2 points this morning, due to rising grain and soy prices on the back of the United States Department of Agriculture's reporting sharply lower production estimates for corn and soybeans. Upward pressure on precious metals prices contributed to the rise in the CRB, which was quoted at 220.96 late this morning.
"The market's rally in the last several months has been predicated on the belief that inflation was moving lower," said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. "The commodity prices and the CPI data are telling a different story."
Recent signs of growth in the economy have made hints of upward price pressures harder to stomach, market players said.
The CPI figures were in line with market expectations and showed that the prevailing inflation scenario remains supportive of the market, economists said. But while the October statistics showed that inflation is not a significant threat to the bond market, they also indicated that there are still some modest price pressures in the economy.
The largest price jump in the CPI came in the gasoline component, which rose 4.5%. Modest increases were reported in prices of cars, medical care, entertainment, and other goods and services.
Mickey Levy, chief economist at NationsBanc Capital Markets, said the CPI report on October producer prices showed that prices at the producer level have achieved "near stability," while prices at the consumer levels are subject to more volatile components like the Clinton administration's gas tax and the services sector.
"Overall, the inflation trend is good," Levy said.
On the inflation front, White House Budget Director Leon Panetta said the Clinton Administration still foresees a stable inflationary environment in the period ahead, despite a report of a 0.4% pickup last month in consumer prices.
Speaking in Washington, Panetta said he expects there to be month-to-month blips in the price data, but the overall long-term trend will remain stable.
The second of this week's refunding auctions drew lukewarm demand at an average and high rate of 5.69%. The bid-to-cover ratio was a disappointing 2.28 and noncompetitive bidding was tepid at $449 million. Coupled with Tuesday's three-year auction results, market observers said sponsorship at the refunding was underwhelming, as other factors held the market's attention
Late yesterday, the market remained under pressure as the CRB index held at alarming levels, and expectations for a strong retail sales report funneled through the marketplace.
Forecasts for a solid retail sales report Friday prompted some accounts to liquidate long positions. Traders also reported some hedge-fund selling securities ahead of today's Veterans' Day holiday.
Economists polled by The Bond Buyer generally expect a 1.0% gain in retail sales for October, a reading which they say would signal a continuation of better consumer spending activity.
Consumer Confidence
Overall consumer confidence remained steady this week at the highest level since mid-may as Americans expressed the same level of confidence in the economy and the spending climate as last week, according to the latest Money Magazine/ABC News poll.
The seven-year-old consumer comfort index remained at the same level as last week: minus 35. That is the index's highest level in 25 weeks and its second highest in 1993.
In futures, the December contract ended down 16/32 to 116.12.Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.12 3.08 3.036-Month Bill 3.27 3.25 3.111-Year Bill 3.40 3.41 3.222-Year Note 4.14 4.12 3.803-Year Note 4.51 4.39 4.065-Year Note 5.06 5.01 4.637-Year Note 5.27 5.23 4.8110-Year Note 5.68 5.63 5.2630-Year Bond 6.20 6.10 5.91 Source: Cantor, Fitzgerald/Telerate
