Uncertainty over the outcome of today's vote on the North American Free Trade Agreement held many investors at bay and prompted a move into short-dated U.S. Treasury paper.
Prices ended narrowly mixed yesterday with the 30-year bond ending down O7/32, to yield 6.16%.
Speculation of the long-awaited U.S. congressional vote on Nafta prompted investors to move money into the front end of the yield curve in order to shield themselves from volatility.
The trade accord has become a touchstone issue for President Clinton's year-old administration. Treasury market players believe that with the removal of trade tariffs with neighboring countries, the prices of many goods will decline. Rejection of the treaty would have negative implications for the U.S. bond market because of the consequences for inflation.
"There's not an awful lot of appetite for long-dated paper and people are taking profits ahead of vote on-Nafta," said James Kenney, head trader at Prudential Securities Inc.
The market opened on a firm note as light buying gave prices a lift, but a lack of follow-though interest sapped strength out of Treasuries. The market then took the path of least resistance and prices edged lower across the maturity spectrum.
The Treasury market has entered a brief consolidation period following sharp price declines in recent weeks, traders said. Underpinning Treasuries is the growing belief that the market has located a bottom where players can tolerate stronger economic growth.
No significant news arose to inspire trading yesterday or to knock Treasuries out of their current trading range. Instead, activity was dominated by technical factors and positioning ahead of the release of economic statistics and the vote on Nafta.
The December bond contract failed to break thorough key resistance at 117.16, and players pushed futures prices lower. Selling in futures carried over into cash and dragged prices lower.
Short-positioning ahead of potential strong economic reports added to the downward pressure on the market. Particularly worrisome is today's housing starts report, which some economists said could present the market with an upside surprise. Economists polled by The Bond Buyer expect a November starts rate of 1.36 million units.
Anthony Karydakis, senior financial economist at First Chicago Corp., said a home builders' report issued yesterday put some pressure on the market, as participants perceived it as a precursor of strength in the Commerce Department's housing starts report.
The November National Association of Home Builders surveyed showed increasing optimism among builders. Sales were termed "good" by 59%, compared with 55% last month, the highest reading in the survey's eight year history. Traffic was "high" according to 49% of those surveyed versus 39% in October.
Looking ahead, the six-month sales outlook was good for 72% of the builders, compared to 61% last month. Economists said the survey suggests that the recent pickup in housing is continuing and supports forecasts for a healthy housing starts report.
In other economic data, the Johnson Redbook report showed that sales at the nation's retailers in the second week of November were up a seasonally adjusted 1.4% from October.
Sales in the second week of November were up 9.6% from the same period a year ago. Last week, the Redbook reported that sales were up 1.7% in the first week of November from October. In the second week of November, sales were strongest in what Redbook staff categorizes as the East followed by the Southeast and Southwest-West, with the Central region trailing.
In futures, the December contract ended up 10/32 tO 117.06.
In the cash markets, the 3 7/8% two year note was quoted late yesterday unchanged at 99.20-99.21 to yield 4.05%, the 4 3/4% five-year note ended up 2/32 at 99.00-99.02 to yield 4.96%, the 5 3/4% 10-year note was up 3/32 at 100.25-100.29 to yield 5.62%, and the 6 1/4% 30-year bond was down 7/32 at 100.31-101.03 to yield 6.16%.
The three-month Treasury bill was down two basis points at 3.09%, the six-month bill was down two basis points at 3.24%, and the year bill was down one basis point at 3.37%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.09 3.11 3.066-Month Bill 3.24 3.25 3.141-Year Bill 3.37 3.38 3.272-Year Note 4.05 4.07 3.823-Year Note 4.39 4.34 4.065-Year Note 4.96 4.98 4.637-Year Note 5.18 5.19 4.80l0-Year Note 5.62 5.61 5.2430-Year Bond 6.16 6.13 5.83Source: Cantor, Fitzgerald/Telerate
