Another upbeat inflation report helped long-term Treasury securities reach new lows in yields yesterday.
The 30-year bond hit another record low when a 5/8-point price gain pushed the yield down to 6.55%.
That is the lowest close on the long bond since the government began selling 30-year bonds regularly in 1977. Tuesday's close was 6.61%.
"What you're seeing here is a reduction in people's inflation fears," said Stephen Gallagher, an economist at Kidder, Peabody & Co. "People are talking about getting to 6.50%" on the long bond.
Yesterday's better-than-expected consumer price report got the rally started. June consumer prices came in flat, when the market had expected a 0.1% increase, and the core rate was up just 0.1%, also below expectations.
The favorable consumer price report, together with yesterday's declines in June producer prices, helped to calm the inflation fears aroused by the big gains in the price indexes during the first few months of this year.
As the day progressed, declines in commodity prices reinforced the bond market's bullish tone.
Gold prices tumbled, and by late yesterday, spot gold was off $3.40 to $390.50 an ounce.
The bond market was also paying close attention to oil prices, which retreated amid talk of a deal that would allow Iraq to sell oil for the first time since 1990. The West Texas Intermediate oil futures contract for August delivery closed 68 cents lower at $17.45 a barrel.
"Oil prices were definitely a plus," Gallagher said. "People were pointing to the deflationary effects lower oil could bring."
The market advanced slowly and calmly, and some traders said they were suspicious of the gains because they were made on relatively light volume. GovPX puts yesterday's volume at $64.8 billion.
Buyers yesterday included municipal issuers doing defeasance deals, portfolio managers who wanted to extend the duration of their holdings by buying long-term paper, and mortgage-backed investors reinvesting cash from paydowns. There was also talk that the long end's gains might reflect some zero coupon purchases for Brazil's debt restructuring.
Some economists argued that yesterday's retail sales report also played a role in yesterday's price gains.
June retail sales matched expectations, with the report showing a 0.4% increase in last month's sales, led by a 1.2% jump in auto sales. Nonautomotive sales were up 0.2%.
Kevin Flanagan, an economist at Dean Witter Reynolds Inc., said the indicators were bullish for the bond market. "We're in an environment of slow economic growth with low inflation," he said.
But Michael Niemira, a business economist at Mitsubishi Bank, said June retail sales were probably stronger than the headline suggested because the total increase was held down by declines in the prices of food and gasoline.
The retail sales report also, contained some upward revisions to previous months' numbers. May sales now show a 0.4% gain, after being reported as unchanged last month, and April's sales were revised up to a 1.9% gain from the 1.5% previously reported.
Daniel Seto, an economist with Nikko Securities Company International, said the sales report showed a little more life in sales than had been evident previously. "With these numbers, it looks as though we're seeing a solid quarter as far as consumer demand goes," he said.
Economists also pointed out that the outstanding inflation numbers in June are probably a temporary phenomenon.
Niemira said a host of special factors combined to produce the flat reading on June consumer prices, including declines in food, tobacco, energy, and apparel.
"I'm not sure when we'll see another unchanged reading on the CPI," Niemira said.
Yesterday's report showed consumer prices rose 3% in the 12 months ending in June, but Niemira estimated inflation is actually running at a 3.5% annual rate.
Joseph Liro, chief economist at S.G. Warburg & Co., said both the May and June price reports probably represented the best inflation numbers the market will see this year.
If inflation does not improve more in the months ahead, the current rate of inflation calls into question the historically low yields at the long end of the Treasury market.
"The question is whether you're comfortable with 350 basis points of real return," assuming a 3% inflation Liro said.
He said the inflation figures suggested the long bond can get to 6.50%, but will not be able to get much below that level.
Yesterday's report showed consumer prices rose 3% in the 12 months ending in June, but Niemira estimated inflation is actually running at a 3.5% annual rate. Joseph Liro, chief economist at S.G. Warburg & Co., said both the May and June price reports probably represented the best inflation numbers the market will see this year.
If inflation does not improve more in the months ahead, the current rate of inflation calls into question the historically low yields at the long end of the Treasury market.
"The question is whether you're comfortable with 350 basis points of real return," assuming a 3% inflation rate, Liro said.
He said the inflation figures suggested the long bond can get to 6.50%, but will not be able to get much below that level.
Yesterday's car sales figures came and went without attracting much comment. Manufacturers reported sales at an annual pace of 6.9 million during the first 10 days of July, down from the 7.7 million pace in late June but slightly above the consensus forecast for a 6.9 million annual rate.
Today's indicators are not likely to have much impact on the market. Economists expect a 0.3% rise in May business inventories, following a 0.1% increase in April, and a 9,000 gain in new jobless claims for the week ended July 10, which would reverse most of the previous week's 12,000 decline.
The September bond futures contract closed 7/8 higher, at 115 23/32, after making a new contract high at 115 26/32.
In the cash market, the 7 1/8% 30-year bond was 22/32 higher, at 107 9/32-107 11/32, to yield 6.55%.
The 6 1/4% 10-year note rose to 103 31/32-104 1/32, to yield 5.69%.
The three-year 4 1/4% note was up 1/8, at 99 30/32-100, to yield 4.24%.
Rates on Treasury bills were lower, with the three-month bill down four basis points at 3%, the six-month bill off three basis points at 3.12%, and the year bill three basis points lower at 3.27%. Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.04 3.08 3.086-Month Bill 3.19 3.19 3.221-Year Bill 3.37 3.40 3.422-Year Note 3.96 3.99 4.053-Year Note 4.24 4.03 4.415-Year Note 4.95 5.03 5.157-Year Note 5.32 5.42 5.5410-Year Note 5.69 5.77 5.9230-Year Bond 6.55 6.67 6.81 Source: Center, Fitzgerald/Telerate
