The Treasury market ended a quiet but upbeat session yesterday as a dip in consumer confidence suggested that the economy is not overheating.
A coupon pass by the Federal Reserve also lifted the market.
Prices closed up across the board, with the benchmark 30-year bond gaining more than 3/8 of a point to yield 7.45%.
Most analysts anticipate that the market will continue trading on an even keel until August employment figures are released on Friday.
An hour earlier than expected yesterday, the Federal Reserve announced a coupon pass, an outright purchase of securities for the Fed's portfolio as the seasonal growth in circulating currency drains reserves from the banking system. The pass resulted in the market's most substantial trading yesterday.
But according to one government trader, the day's biggest story came in the form of rumors that some dealers were shut out of the bidding for the pass, which resulted in a price decline early in the afternoon.
For the first time, the Fed received coupon tenders electronically rather than over the phone, the trader said, and so some dealers missed the deadline for submitting bids.
Yesterday morning, note and bond prices improved on the heels of the Conference Board's report of declining consumer confidence. The August consumer confidence index slipped to 89.0 versus July's revised 91.3.
Stephen S. Roach, an economist with Morgan Stanley & Co., said the confidence index was "a little bit softer than we were looking for," and consistent with cautious consumer sentiment in the wake of six months of Federal Reserve tightening.
The index numbers are off three and one half points from their recent highs, Roach said, "which takes some of the steam out of the economy."
Another indicator released yesterday morning, new single-family home sales in July, showed its biggest gain, at 8.3%, since an 8.6% rise in February.
The home sales number was stronger than expected, at 664,000 units compared to an expected rate of about 610,000. Meanwhile, June home sales were revised to down 11.4% from down 14.1%.
Roach said the July number indicated "a housing market that's softening as interest rates rise. The focus is on employment, and we'll stay range-bound until Friday."
The market received some solace from a drop in retail sales reported later in the afternoon. Sales by retailers were down 1.1% in August from a month earlier, according to the Johnson Redbook survey.
In late trading yesterday, the 10-year note was up 1/4 point to yield 7.18%, the seven-year was up 7/32 to yield 6.99%, and the five-year was up 1/8 to yield 6.82%.
At the short end, the yield on the three-month bill was off two basis points to 4.68%, the yield on the six-month bill dropped three basis points to 5.07%, and the yield on the one-year bill declined three basis points to 5.52%.
The September Treasury bond futures contract ended up 1/2 point at 103 15/32.
In dollar trading, the U.S. currency dropped against most European currencies as the French central bank raised interest rates. But the dollar held steady against the German mark as traders await a Bundesbank meeting scheduled for tomorrow. Expectations are that Germany will ease monetary policy.
Corporate Market
Lockheed Corp. and Martin Marietta Corp. agreed yesterday to a merger by swapping common stock valued at more than $10 billion.
Standard & Poor's Corp. and Moody's Investors Service followed with word that they may raise debt ratings for both of the military contractors. The companies have a total of about $3.3 billion of outstanding bonds.
"Assuming the merger is consummated, ratings of Lockheed are very likely to be raised," Standard & Poor's said in a release. "It is, however, less likely that S&P will change Martin Marietta's ratings."
Standard & Poor's rates Lockheed's senior debt A-minus and Martin Marietta's senior debt A. Moody's rates Lockheed Baal and Marietta A3.
One bond trader said Lockheed's long-term bonds tightened by 10 to 15 basis points compared to Treasuries following the announcements. There was no noticeable effect on Marietta's credit, he said.
Elsewhere in the corporate market, action was restrained as players began to count down the days to the Labor Day weekend.
"You can sum it up in one sentence: No demand. Nothing at all, just dead quiet," a corporate bond trader said.
Below investment-grade bonds ended mostly unchanged. Treasury Market Yields Previous Previous Monday Week Month3-Month Bill 4.68 4.67 4.426-Month Bill 5.07 5.10 4.901-Year Bill 5.52 5.61 5.332-Year Note 6.14 6.19 5.953-Year Note 6.42 6.53 6.245-Year Note 6.82 6.92 6.727-Year Note 6.99 7.10 6.8710-Year Note 7.18 7.28 7.0830-Year Bond 7.45 7.53 7.39 Source: Cantor, Fitzgerald / Telerate
