Treasury note and bond prices tried to do better yesterday, but a late-day comment by Federal Reserve Chairman Alan Greenspan wiped out most of the session's gains.
Late in the afternoon, the 30-year bond was unchanged and yielded 6.99%, after having been up as much as 3/8 point earlier in the day. Note prices closed unchanged to slightly higher.
Treasury securities have been battered recently, especially at the front end, as investors faced the possibility the Federal Reserve would boost rates. But prices began to improve yesterday in overseas trading as some investors saw value in the lower price levels.
The market also benefited from the Conference Board's report of a surprisingly big drop in consumer confidence during May, and it tried to add to its earlier gains after the well-bid two-year note auction.
But all the improvement in note and bond prices evaporated after Greenspan said in Dallas that advances in technology might soon result in a "major expansion in employment."
The Fed chairman said the restructuring of the U.S. economy had caused job losses, but added, "I doubt the job issue will be with us past the restructuring."
"Greenspan's comment hit us pretty hard," said Jerry Zukowski, an economist at PaineWebber Inc.
Zukowski said the chairman's apparent optimism about the employment outlook was especially damaging given the market's current fears of a Fed tightening.
In general, Zukowski said, yesterday's skittish trading reflected the bond market's "weakened underpinning," now that investors are faced with worries about inflation and a less accommodative Fed.
"The bears are starting to surface," he said, and in that market environment, "there is a greater willingness to hit the bid" when the news is bad.
Jay Goldinger, a market strategist at Capital Insight Inc. in Los Angeles, said selling short-term paper was "the name of the game" these days in the Treasury market.
"There are just sellers in the market who are afraid the Fed will tighten," Goldinger said.
Although The Wall Street Journal reported Monday that Fed policy-makers had adopted a bias toward tightening at last week's meeting, most economists think the sluggish economy will forestall any immediate tightening.
Mr. Goldinger said he does not think it is likely the Fed will raise short-term rates any time soon, but added, "That doesn't mean I'm going to stand in front of a freight train."
The two-year sale had gone much better than expected, but yesterday afternoon's sell-off left the issue trading at a loss. Late in the afternoon, the new 4 1/8% notes were bid at 4.21%, after having been auctioned at 4.17%.
James Kenney, head of Treasury trading at Prudential Securities, said the strength at the auction seemed to reflect the over-aggressive bidding by dealers that sometimes occurs at dutch auctions, rather than any surge of interest from retail investors.
"We managed to hold the auction at the highs, stick everyone with two-year notes with levels we hadn't seen for the last couple of days, then turn around and take it back down again." he said. "As a result, everyone's got notes they don't want."
The 4.17% average on the $15.78 billion of notes compared with the 4.18% bid at the auction deadline and market expectations that the issue would be sold at about 4.19%.
The details of the results looked strong, too. There were $54.224 billion of bids submitted, or 3.44 bids for every security being auctioned, which compares with the 2.64-to-1 average bid-to-cover ratio at previous two-year dutch auctions.
The market faces more supply over the next couple of sessions. The government will sell $11 billion of five-year notes today and $14.75 billion of year bills tomorrow.
Traders said the sell-off yesterday afternoon should make the five-year notes more attractive. And Jerry Zukowski noted that "to the extent that you subscribe to the yield curve flattening trade, you'll buy fives, not twos."
Kenney said he expects the market to "continue to chop around in a fairly narrow range," with the 30-year bond yield circling 7%. But he said expected downward revision to first-quarter gross domestic product, combined with the three-day weekend, might result in a short-covering bounce later this week.
Traders said the weaker dollar and rise in gold were other problems for the long end yesterday.
A Treasury report suggesting that a stronger yen would help correct the trade imbalance between Japan and the United States sent the dollar lower yesterday. Late in the day, the dollar was quoted at 109.40 yen, down from 110.65 late Monday. Comex gold for June delivery jumped $4.50, to $378.70.
The only economic news that had much impact on the bond market yesterday was the consumer confidence report.
The Conference Board said its May index of consumer confidence fell to 61.5% from a revised 67.6% April reading. The consensus forecast called for a smaller decline, to 64.9%.
The May decline put the index at its lowest level since last October.
Stephen Gallagher, an economist at Kidder Peabody & Co., said the report matches what the University of Michigan's surveys have been saying: "The economy's not out of trouble yet."
Gallagher said most of the weakness was in the future expectations component, which seems to reflect consumers' concerns about developments in Washington, D.C.
Yesterday morning's 2.7% rise in April existing home sales had little impact on Treasury prices. The increase put April sales at a 3.46 million annual rate.
Later in the day, the Johnson Redbook report showed department store sales in the week of May 22 fell 1.8% from the same period in April. In contrast, mid-May car sales were much stronger than expected at a 7.4 million annual pace, up from the 6.4 million rate during the first 10 days of the month.
Zukowski said the strength in car sales argues against reading too much into the weakness in confidence.
The June bond futures contract closed 1/8 lower at [110.sup.5]/32.
In the cash market, the 7 1/8% 30-year bond was unchanged, at 101 16/32- 101 18/32, to yield 6.99%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.11 3.06 2.956-Month Bill 3.29 3.19 3.081-Year Bill 3.49 3.37 3.232-Year Note 4.16 4.02 3.823-Year Note 4.58 4.46 4.245-Year Note 5.35 5.26 5.167-Year Note 5.78 5.74 5.6110-Year Note 6.15 6.11 6.0230-Year Bond 6.99 7.01 6.89Source: Cantor, Fitzgerald/Telerate
