Most Treasury prices ended slightly lower yesterday, with the 30-year bond off 1/4 point to yield 7.65%, after concern about this week's ample supply of new paper pushed the market down early in the day.
Prices slowly recovered during the course of the afternoon, but traders said flows had been so sparse yesterday that it did not take much to push prices higher or lower.
"We go up and down pretty quickly here," a note trader said. "I don't think it tells us anything one way or the other, except that the market's thin.
"We'll have to wait until it's time to step up and buy [at the auctions] to see where the market is," he added.
The Treasury will sell $15 billion of two-year notes today and $10.75 billion of five-year notes tomorrow.
Treasury prices have fallen dramatically in recent weeks on worries about a Clinton presidency and the heavy supply calendar that starts this week.
Traders said the market's tone is still sour and could scare retail investors away from this week's auctions.
Market participants are also worried that banks, which have been big buyers of short-term notes over the last couple of years, might be losing interest. There were rumors last week that banks were selling Treasury holdings because they were seeing better loan demand.
Complicating the sttuation further is the Treasury's experiment with the dutch auction method for two-year and five-year sales. In a dutch auction, all bids are awarded at the lowest price it takes to distribute all the securities.
"The danger is that prior to the election, bidding may be tentative, so the tail could make it expensive for the Treasury," an analyst said.
Traders said the early price declines yesterday,also reflected reports that Japanese banks would be discouraged from holding U.S. mortgage-backed securities.
A wire service reported yesterday morning that the Japanese Ministry of Finance was going to boost banks' risk-weighting requirement for mortgage-backed securities to 100%.
But Daniel Seto, an economist at Nikko Securities, questioned how much impact the report could have had, given that Japanese banks' holdings of mortgage-backed securities are not huge and the change apparently would not take effect until March of next year.
Seto said supply fears were a much more credible reason for the price declines.
"You're looking at the first dutch auctions in an environment where rates are going up," he said. "It creates a lot more uncertainty about where dealers should be bidding on these things."
But some traders said the market has gotten cheap enough to represent value. A coupon trader said he saw signs of that yesterday, noting that the when-issued five-year notes started to attract interest when they hit 5.98% yesterday morning.
Late yesterday, the when-issued five-years were bid at 5.92%.
"The market's starting to get a few fans it didn't have last week," the trader said.
The short-term trader said talk of a Fed bill or coupon pass over the next couple f days had also given some support to the market.
The Market ignored the weaker-than-expected report on September existing home sales released yesterday morning.
According to the National Association of Realtors, existing home sales fell 0.9%, to a 3.28 million annual rate, following a 4.1% decline in August.
Prices fell yesterday even though polls released over the weekend showed independent candidate Ross Perot picking up support at the expense of Democtratic candidate Bill Clinton,who has lost some of his lead over President Bush.
Much of the sell-off in recent weeks has been blamed n Clinton's strong showing and the market's fears that he would stimulate the economy at he expense of the budget deficit.
But a London dealer said at this point, almost any news is bad news.
"The market's got a death wish," he said. "Anything that gives greater uncertainty is bad."
U.S. traders pointed out that though Clinton's lead may be smaller, he is still outperforming Bush in the polls.
The December bond futures contract closed unchanged at 102 14/32.
In the cash market, the 7 1/4% 30-year bond was 9/32 lower, at 95 3/32-95 7/32, to yield 7.65%.
The 6 3/8% 10-year note fell 5/32, to 96 22/32-96 26/32, to yield 6.82%.
The three-year 4 5/8% note was down 1/32, at 99 10/32-99 12/32, to yield 4.88%.
In when-issued trading, the two-year note to be sold today was bid at 4.41%.
Rates on Treasury bills were mixed, with the three-month bill down three basis points lower at 2.92%, the six-month bill two basis points higher at 3.22%., and the year bill unchanged at 3.40%.
Treasury Market Yields
Monday Week Month
3-Month Bill 2.96 3.02 2.81
6-Month Bill 3.29 3.18 2.91
1-Year Bill 3.51 3.40 3.01
2-Year Note 4.32 4.11 3.77
3-Year Note 4.86 4.63 4.21
5-Year Note 5.87 5.68 5.27
7-Year Note 6.40 6.24 5.86
10-Year Note 6.82 6.68 6.34
30-Year Bond 7.65 7.57 7.33
Source: Contor, Fitzgerald/Telerate