The Treasury's benchmark bond had a day to remember yesterday, rallying more than a point and closing higher for the first time in nine sessions.
The 30-year bond finished the day yielding 6.29%.
No fresh news arose to inspire trading, and prices lifted on mere position squaring as the market crept higher. The rebound in prices did not reflect a genuine turn in market sentiment and most market players remained passive observers to the price up-draft, market participants said.
The bulk of the gains reflected short covering in response to a solid note auction and declines in commodity prices.
Many players shorted Treasuries in recent weeks as market fundamentals and technicals turned negative. But ahead of the upcoming holiday weekend and against the backdrop of retail buying interest early in the session, dealers covered positions. Most of the buying took place at the long end of the curve, but the short-covering rally spilled over into other sectors of the market, traders said.
"Dealers saw the market in a technically oversold condition and saw fit to buy back positions," said Kevin Flanagan, money market economist at Dean Witter Reynolds Inc. "The bond has underperformed the rest of the curve and we saw the bond outperform the rest of the issues for a change."
The Commodity Research Bureau index of commodity futures plunged on the back of lower oil prices. Energy prices fell on a combination of hopes for successful negotiations between the United Nations and Iraq and doubts that Organization of Petroleum Exporting Countries will significantly cut production schedules. The January crude oil contract fell 47 cents to $16.63 and the CRB ended down 1.53 to 222.18.
The drop in the CRB index was interpreted as a positive development for the market, given that prices fell in recent sessions on rising commodity prices and uncertainty over the direction of prices of energy and precious metals prices.
Downward pressure on commodity prices and the resulting short-covering rally paved the way for a decent five-year note auction. The Treasury's sale of $11 billion in five-year issues was awarded at 5.20% with a median at 5.18%.
The Treasury market's performance yesterday was impressive in that prices rose despite failure by the Federal Reserve to arrange an outright purchase of notes and bonds. The market firmed throughout the day on speculation that the central bank would announce a coupon pass to meet a seasonal shortage of reserves in the banking system. Dealers speculated that failure by the central bank to buy coupons would send prices spiraling lower.
"The market rallied even without the coupon pass, which implies that people are finding value in yields at current levels," said one head trader at a primary dealership. "While no one thinks the buying we saw is a reversal of the market's bearish trend, it is a positive development."
Fed watchers are now speculating that the Fed will arrange a coupon pass next week.
Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., expects the central bank will make an outright purchase of notes and bonds next Wednesday to address a seasonal increase in currency in circulation.
Adding marginally to the market's positive tone yesterday was the Johnson Redbook survey of weekly retail sales activity, which showed slightly slower growth in sales. Seasonally adjusted U.S. department and chain store sales rose 0.9% in the first three weeks of November versus October.
Seasonally adjusted sales for the first three weeks of November were up 9.1% from a year ago. The Redbook reported that sales growth was strongest for the East, followed by the Central region, the Southeast, and the Southwest-West.
Today's October durable goods orders report could pose some problems for the market, as many economists expect it will support the notion of stronger growth in the economy. Market analysts polled by The Bond Buyer generally expect an increase of 1.9%.
In futures, the December contract ended up 1 3/32 to 115.23.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday Up 5/32 at 100.03-100.04 to yield 4.18%. The 4 3/4% five-year note ended Up 12/32 at 98.12-98.14 to yield 5.11%. The 5 3/4% 10-year note was up 26/32 at 99.20-99.24 to yield 5.78%. And the 6 1/4% 30-year bond was up 39/32 at 99.10-99.14 to yield 6.29%.
The three-month Treasury bill was down two basis points at 3.12%, the six-month bill was down three basis points at 3.27%, and the year bill was down four basis points at 3.46%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.12 3.09 3.096-Month Bill 3.27 3.24 3.191-Year Bill 3.46 3.37 3.312-year Note 4.18 4.05 3.893-Year Note 4.51 4.39 4.175-Year Note 5.11 4.96 4.747-Year Note 5.33 5.18 4.9410-Year Note 5.78 5.62 5.3830-Year Bond 6.29 6.16 5.97Source: Cantor, Fitzgerald/Telerate