After two sessions of sharp declines, Treasury prices located a bottom yesterday as buyers emerged to take advantage of the attractive yields levels brought on by this week's correction.
A late afternoon rally help the 30-year bond recover and end the session down 4/32, to yield 5.97%. The long bond was down more than one point early in the session.
The long-awaited correction in the Treasury market materialized this week as a larger than expected jump in consumer prices for August turned buyers into sellers and put players on the defensive.
While the inflation numbers were not all that bad, the bond market got spoiled after the decline in the producer price index for August and had built in expectations for a similar reading on the consumer price index.
When the release did not come as expected, retail accounts came off the sidelines to unload securities purchased in recent weeks, reinforcing the message that the market is not immune to bad news.
Traders said activity this week has set the stage for the 30-year bond to begin a period of consolidation near the 6% yield level, as the economic releases in coming sessions will be of little significance.
Trading yesterday was characterized by wild swings in prices. Steady waves of selling pressures pushed yields higher early in the session and cast an element of uncertainty into the market's outlook. The bulk of the selling pressure reflected fears that further declines in prices would cut into investors' profits.
Some investors saw those price declines as buying opportunities and helped the market establish a bottom. A steady stream of buyers emerged through the afternoon when it seemed prices had fallen far enough and that the market had worked though its need to correct.
"The correction and consolidation that the market needed has finally taken place," said Kevin Flanagan, money market economist at Dean Witter Reynolds Inc. "But as yields backed up, the market realized that the bond above 6% represented value and they came in to buy it."
Traders reported that the Brazilian government was buying large volumes of stripped securities, which helped the long end of the curve recover steadily through the afternoon. The short end of the market put in a solid performance, in sympathy with the correction at the long end.
Anthony Karydakis, senior financial economist at First Chicago Corp., attributed buying at the front end of the curve to a story on the Dow Jones Capital Markets newswire that the voting panel of the Federal Reserve Open Market Committee is likely to have a membership next year more willing to spur economic growth and less concerned with fighting already tame inflation.
Market observers still generally believe that economic and inflationary fundamentals support the market and they expect prices to stabilize at current levels.
Paul Kasriel, market strategist at Northern Trust Securities in Chicago, said despite the market's selloff, the factors which brought yields to their lowest levels in 25 years are still in place.
"Everything points to a modest rate of inflation and growth and market fundamentals are supportive of these levels," Kasriel said. Retail investors are generally on the sidelines waiting to see if the market finds a solid bottom near current levels. While players on the buy side of the market have been lightening inventories in the last two sessions, market participants said another large wave of selling pressures is likely to prompt many accounts to sell securities.
As the Treasury market has grappled with the belief that Federal Reserve policy is on hold, a couple of U.S. banks decided go against the flow and attempt to stimulate their own recovery.
Southwest Bank of St. Louis and Central Fidelity Bank, frequently leaders in reducing lending rates, slashed their prime lending rates to 5.75% from 6%., the lowest level since early 1970.
Virginia-based Central Fidelity Bank, with $9.1 billion in assets, said it was lowering its prime rate immediately, while Southwest said its cut takes effect today.
Officials at the banks said the reductions in the prime were aimed at spurring loan demand and increasing competition in their markets. Officials at both both banks acknowledged that loan growth is slow because of slack demand stemming from the consumer and corporate debt hangover from the 1980's.
Bank analysts said the rate cuts were not indicative of any potential policy move by the Fed and they do not believe lower cost of money will spur increased loan demand. Analysts also noted that the rate cuts will probably do little to spur cash-strapped Americans to spend or borrow more unless credit card interest rates charged by banks are slashed as well.
"It's unlikely to result in stronger loan demand, given the weakness of the economy," said Lawrence Cohn, banking analyst at Paine Webber Inc. Cohn said the banks cut their prime rates in a move to stimulate a shift in market share and, like other analysts, he does not expect other banks to follow their example.
"They're hoping to make up in volume what they'll lose in price. But at 6%, a rate cut is going to affect their profitability."
The Treasury announced of the size of next week's two-year and five-year note auctions yesterday. The offering was unchanged from last month's offering of $16 billion in two-year notes and $11 billion in five-year notes. The issues will likely raise a combined $4.7 billion in new cash.
Some analysts expect the Treasury to boost the sizes of note offerings in the months ahead, especially now that the House has approved funding to resume the savings and loan bailout through the Resolution Trust Company.
In futures, the September contract ended down 3/32 to 120.09.
In the cash markets, the two-year note was quoted late yesterday up 3/32 at 100.01-100.02 to yield 3.84%, the 4 3/4% five-year note ended up 9/32 at 100.04-100.06 to yield 4.70%, the 5 3/4% 10-year note was down 5/32 at 102.28-103.00 to yield 5.35%, and the 61/4% 30-year bond was down 4/32 at 103.22-103.26 to yield 5.97%.
The three-month Treasury bill was down two basis points at 2.97%, the six-month bill was down two basis points at 3.07%, and the year bill was down three basis points at 3.23%.
Confidence Unchanged
Overall consumer confidence held steady this week at its highest level since early June as Americans grew more upbeat about the future of the national economy, according to the latest Money Magazine/ABC News poll.
The closely watch index remained at -36 in the latest week, with a slight gain in Americans' assessments of today's buying climate effectively canceling out a slight loss of faith in their own finances. Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.01 3.00 3.036-Month Bill 3.14 3.13 3.181-Year Bill 3.33 3.28 3.372-Year Note 3.84 3.75 3 943-Year Note 4.12 4.04 4.335-Year Note 4.70 4.61 5.017-Year Note 4.92 4.82 5.2910-Year Note 5.35 5.22 5.6730-Year Bond 5.97 5.86 6.25Source: Cantor, Fitzgerald/Telerate
