Long-Term Treasury securities surged higher yesterday as the market priced in the favorable October inflation numbers it expects to get this week.
Late in the day, the wehn-issued 8% 30-year bond was 1 1/32 higher at 102 11/32-102 15/32 and yielded 7.78%. That is just a hair away from the year's previous high of 7.77% posted on Oct. 7.
A large part of yesterday's gains were made overnight in London and Tokyo. Activity was quiet during the New York session, ad traders said investors had paused to wait for this week's indicators, which start today with the October producer price report.
The long bond traded between 101 21/32 and 101 29/32 overnight in Tokyo, where there were reports of a big buyer of 10-year notes and bonds and reached a high of 102 10/32 during the London morning session.
In London, a dealer speculated that curve trades were adding to the long end's strength. "The way it's trading, it feels as if steepening trades are coming off or flatteners are going on," he said.
Traders bet on a flattening yield curve by buying long-term securities and establishing short positions at the short end.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 4.73 4.87 5.08
6-Month Bill 4.87 4.88 5.17
1-Year Bill 4.95 5.05 5.25
2-Year Note 5.62 5.69 5.81
3-Year Note 5.95 6.01 6.07
4-Year Note 6.04 6.13 6.27
5-Year Note 6.62 6.78 6.76
7-Year Note 7.01 7.19 7.11
10-Year Note 7.34 7.54 7.41
15-Year Bond 7.60 7.86 7.69
30-Year Bond 7.78 8.02 7.85
Source: Cantor, Fitzgerald/Telerate
As the long end has outperformed the short end in recent sessions, the yield curve has reversed a big part of its recent steepening.
The 30-year bond was yielding 216 basis points more than the two-year note late yesterday, down from 227 late Friday and from the high of 240 reached last Wednesday.
The London dealer predicted the long bond's advantage over the two-year note could go as low as 200 if this week's inflation numbers are favorable.
Michael Moran, chief economist at Daiwa Securities, said the flattening of the yield curve reflected a number of factors besides the hopes for lower inflation rates, including the successful completion of last week's quarterly refunding and the fact that discussion about federal tax cuts is fading.
While long-term securities are flourishing, the short end has less to look forward to.
The Federal Reserve has eased monetary policy twice in recent weeks, and an article in yesterday's Los Angeles Times argued the Fed was through easing, at least for the rest of this year.
According to the story, an unnamed senior Fed official said policymakers agreed at last week's Federal Open Market Committee meeting that they would ride out "'a bad month or two'" and only cut rates again "'if things get bad for several months and really go into a free-fall.'"
The article cited the Fed's "deep-seated fears about a resurgence of inflation." It said some Fed officials are worried that if they ease again this year, it will aggravate inflationary pressures next year and put them in the awkward position of having to raise interest rates during an election year.
Mr. Moran said the article had an air of authority. But he said he disagreed with the underlying premise that the economy can continue to do improve on its own without any more help from the Fed.
"I still feel the economy is going to need more stimulus from the Fed," Mr. Moran said. "I think the chances are high that they're going to ease again."
Traders said there was good demand for the $20.4 billion of Treasury bills that were auctioned yesterday.
The three-month bills came at an average rate of 4.64%, down from the 4.74% rate at the previous week's acution, and the six-month bills were sold at 4.71%, down from 4.80% the week before. The rates take the three-month and six-month bills back to levels last seen in April, 1977.
Economists expect today's October producer price report to show 0.1% gains in both the overall index and the rate of inflation minus food and energy costs.
Traders said that kind of report would allow prices to go higher. But some felt any further gains would lead to profit-taking, since the market is so close to the year's highs.
The head of a trading desk disagreed, saying the skepticism about being at such a high levels has kept participants cautious. He argued that the market has more room to the upside than to the downside.
The Federal Reserve intervened a half-hour earlier than usual yesterday. But analysts said the timing of the Fed's two-day system repurchase agreements just showed it needed to inject a large amount into the monetary system.
The December bond future contract closed 9/16 higher at 101.
In when-issued trading, the 30-year 8% bond was 1 1/16 higher, at 102 12/32 102 16/32, to yield 7.78%.
The when-issued 7 1/2% 10-year note rose 1/2, to 100 31/32 - 101 3/32, to yield 7/34%.
The when-issued three-year 6% note ewas unchanged, at 100 2/32- 100 4/32, to yield 5.95%.
Rates on Treasury bills were mixed, with the three-month bill steady at 4.63%, the six-month bill up one basis point at 4.74%, and the year bill two basis points higher at 4.73%.