Treasury prices dropped across the yield curve yesterday, as fresh news and rumors created a mild, inflation-fearing sell-off.
In late afternoon trading, the 6 1/4% 30-year bond was down 26/32 to yield 5.99%. The 53/4% 10-year note was off 19/32 to yield 5.34%. The 5 1/2% seven-year note was down 13/32 to yield 4.93%.
Traders attributed the sell-off to various bits of news, real and imagined.
In the morning, a speech by Treasury Secretary Lloyd Bentsen unsettled the market's expectations for low growth and low inflation.
"The economy is preparing for a strong upswing. There are increasing signs that business investment is growing and production will rise," Bentsen told attendees of the World Bank's annual meeting in Washington.
Bentsen also called for more government action worldwide to spur job growth.
"Growth cannot be achieved by pronouncement -- only by good policies. Our challenge is to find the political will to implement those policies. I believe we are doing that," Bentsen said.
John Lonski, an economist for Moody's Investors Service, attributed some of the market's decline to a rise in oil prices. West Texas intermediate crude rose to $18.67 a barrel from $17.96 the day before.
The price increase "in response to a credible OPEC oil production pact and Siberia's threat to halt oil and gas exports sullied optimistic inflation views," Lonski wrote in a market commentary yesterday. Traders said rumors that inflation numbers, due in the middle of next month, will show prices rising also hurt the market. A supposed leak of an improvement in the Conference Board's help wanted advertising index created additional selling sentiment, traders said.
Revised second-quarter gross domestic product figures released in the morning had little market impact. The economy grew at a revised 1.9% annual rate for the quarter, up 0.1% from the previous estimate.
Changes in inventories were revised to a drop of $16.3 billion from a drop of $15.4 billion in the previous estimate. The implicit deflator was unchanged at 2.3%. Corporate profits rose 5.2%, up 3.1% from the report.
After the GDP figures were released, the market dropped slightly. The 30-year bond was off 2/32 to yield 5.93% in early trading.
At the short end, prices were mixed throughout the day. The Federal Reserve intervened overnight after the federal funds rate crept to 3.25%.
Rates on the Treasury's three-month bill were down one basis point to 2.93%. The six-month bill was up one basis point to 3.06%, and the yield on the year bill was up two basis points to 3.23%.
The 3 7/8% two-year note was down 2/32 to yield 3.84%, and the 4 3/8% 3-year note was down 6/32 to yield 4.15%.
In the futures market, the price of the September Treasury blind contract closed down 30/32 to 119 2/32.
In other news, the Chicago Board of Trade announced yesterday that it would begin offering customized options on Treasury-related derivatives.
The customized options, known as Flexible Contract term options, will allow investors to set the strike price, expiration date, and exercise style of options on 30-year Treasury bond, 10-year, five-year, and two-year Treasury note futures.
The Chicago Board Options Exchange first introduced customized, exchange-traded options in February. The Options Exchange, which limits its program to equity-related options, says $10 billion of flexible options have been issued in the past seven months.
The board of trade's product is designed to compete with the over-the-counter fixed-income derivatives market.
In the past, investors seeking unusual or customized options had to buy them from individual dealers in the over-the-counter arena. Such options are backed only by the firm that sells them. If the firm cannot make good on its commitment, the investor has little recourse.
The flexible options are traded through the board's clearing house, eliminating the credit exposure to dealers inherent in OTC options.
"With this new complex, investors can enjoy the enhancements offered by customized interest rate derivative products combined with the benefits of highly successful CBOT-traded contracts," said Patrick H. Arbor, chairman of the board, in a statement.
The new options will be available as puts or calls. Investors will have to place a minimum order of 200 contracts to create a particular flexible option. The Chicago Board of Trade will not allow investors to duplicate existing options using the flexible options program.
The Commodities Futures Trading Commission must still approve the flexible Treasury option plan, but the board of trade expects to begin offering the product on November 12. Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 2.97 2.96 3.056-Month Bill 3.13 3.13 3.181-Year Bill 3.33 3.36 3.342-Year Note 3.84 3.89 3.853-Year Note 4.15 4.16 4.175-Year Note 4.75 4.76 4.807-Year Note 4.93 4.96 5.0310-Year Note 5.34 5.41 5.4430-Year Bond 5.99 6.08 6.08Source: Cantor, Fitzgerald/Telerate
