Treasuries ended mixed yesterday with the short end turning in the best performance after a decent note auction and the long end lagging behind as players unwound yield-curve flattening trades.
The 30-year bond ended down more that 1/8 of a point, to yield 7.53%, while the two-year note closed up 1/32, to yield 6.08%. Short-dated governments reacted positively to healthy demand for the first of this week's monthly note auctions. The Treasury's sale of $17.1 billion of two-year notes met with better-than-expected demand yesterday, despite widespread expectations for a near-term tightening of monetary policy.
"Dealers' ability to absorb supply impressed the market enough to help the short end out of its recent slump," a bond market strategist said.
Market participants were particularly encouraged by the market's ability to absorb supply in the face of potentially tighter credit and higher interest rates. With the two-year sale out of the way and with decent results to boot, dealers grew slightly more optimistic yesterday that the five-year note auction -- typically a harder sell than the two-year -- will similarly draw decent demand.
The long end of the market did not fare as well Tuesday, losing some ground as accounts unwound the yield-curve flattening trades that were put on over the last few days.
Placing additional pressure on the longer maturities was a Labor Department report that showed a disturbing gain in U.S. wage costs. The U.S. employment cost index posted a 0.9% gain in the second quarter. Analysts had been expecting a smaller gain of 0.6%, a figure which would have been in line with the 0.7% increase in the first quarter.
Overall, the two-year note sale dominated the market's attention as investors remained curious as to how the fixed-income markets would manage new supply.
The new Treasury notes were awarded at a 6.17% yield, slightly lower than the 6.18% level dealers were expecting at around the time of the auction deadline. The new notes will bear a 6 1/8% coupon.
The details of the auction results were equally supportive to the market: the ratio of bids submitted to the size of the issue was around the average for two-year sales and noncompetitive bids were healthy. The bid-to-cover ratio of 2.68 to 1 was in line with the average ratio of about 2.67 to 1 at two-year note sales over the last year.
Apparent from the auction results were the lingering effects of Fed chairman Alan Greenspan's Humphrey-Hawkins testimony. Dealers had ample time to set up short positions in both of the notes to be auctioned this week as prices slid lower in response to Greenspan's comments.
Greenspan, in his semiannual Humphrey-Hawkins testimony last week before the Senate Banking Committee, indicated that the central bank is still concerned over the pace of economic growth, inflation, and the weak U.S. dollar. Bond market players took the comments to mean that the Fed will again raise rates.
Against that backdrop, dealers established short positions and attempted to build a concession into the market ahead of the note sales. Participants said that with the Fed in a tightening mode, the when-issued notes were a bit rich for some investors' tastes.
"The market got caught short for all the right reasons," a trader said. "The large short base was largely responsible for the success of the auction."
Still, players warned against reading too much into the results. Most said that with the five-year sale on deck, few investors were willing to interpret healthy bidding on the two-year as a referendum of better market sentiment.
On the minds of some fixed-income observers was the market's lackluster response to the two-year auction results. Traders said prices across the yield spectrum should have gotten more mileage out of a surprisingly strong auction. While auction went well, players said the bulk of the buying was dealer short covering. And the lack of follow-through buying after the auction reflected the lack of retail interest in the market.
Paul Kasriel, monetary economist at Northern Trust Securities Co., said anticipation for the five-year auction eclipsed some economic statistics that normally would have sent Treasuries prices higher.
One report came from the Conference Board which reported that its July consumer confidence index slid to 91.6 from June's revised 92.5. Another came from the Johnson Redbook Service, which reported that U.S. retail store sales fell 0.4% on a seasonally adjusted basis in the three weeks ended July 23 compared with the average level for all of June.
"I think people are reluctant to do much ahead of the five-year results," Kasriel said.
In the futures market, the September bond contract ended down 6/32 at 102.28.
In the cash markets, the 6% two-year note was quoted late Tuesday up 1/32 at 99.26-99.27 to yield 6.08%. The 6 3/4% five-year note ended unchanged at 99.13-99.15 to yield 6.87%. The 7 1/4% 10-year note ended down 3/32 at 99.28-100.00 to yield 7.24%. The 6 1/4% 30-year bond ended down 5/32 at 84.25-85.29 to yield 7.53%.
The three-month Treasury bill ended down one basis point at 4.50%. The six-month bill closed down one basis point at 4.97%. The year bill also ended down one basis point at 5.51%.
Corporate Securities
Activity in the corporate securities market intensified yesterday as issuers took advantage of stability in Treasuries and buyers came off the sidelines.
Against the backdrop of improved conditions for U.S. fixed-income markets, a number of corporate treasurers unveiled their offerings in the primary market.
The volatile governments market held new-issue corporate volume to a minimum in recent weeks. In the last two weeks, however, bond market participants had a more optimistic view of their prospects now that the economy has displayed the mark of slower growth.
ABM Amro Bank, New York Branch, priced $200 million of 15-year subordinated notes to yield 8.275%, according to lead manager Goldman, Sachs & Co.
The notes, noncallable for 10 years, were priced at 99.786 and bear an 8.25% coupon. They are rated Aa2 by Moody's Investors Service.
Also in the primary, Coming Inc. issued $100 million in 30-year bonds to yield 7.675% via Goldman, Sachs & Co.; International Lease Finance Corp. issued $100 million of three-year senior notes to yield 6.75% via Lehman Brothers Inc.; and West Pennsylvania Power priced $65 million in 30-year first mortgage bonds via Prudential Securities Inc.
In the Secondary market, Digital Equipment Corp.'s debt sagged amid news of a larger-than-expected fourth quarter loss and reports that the firm remains cautious in its outlook for fiscal 1995.
Digital posted a loss of $1.746 billion, compared with a gain of $113.196 billion in the year-ago period.
The company's 7% notes due 1997 widened by 25 basis points on the reports and were quoted late yesterday at a bid yield spread of 365 basis points over comparable Treasuries.
Spreads of investment-grade issues ended down 1/4 of a point yesterday, while high-yield bonds ended narrowly mixed.Treasury Market Yields Prev. Prev. Tuesday Week Month 3-Month Bill 4.50 4.35 4.25 6-Month Bill 4.97 4.79 4.72 1-Year Bill 5.51 5.23 5.43 2-Year Note 6.08 5.91 6.10 3-Year Note 6.40 6.22 6.38 6-Year Note 6.87 6.71 6.86 7-Year Note 7.05 6.91 6.89 10-Year Note 7.24 7.13 7.22 30-Year Bond 7.50 7.46 7.50
Source: Cantor, Fitzgerald/Telerate
