Prices ended lower yesterday as concerns over the budget continued to hold the market's attention.
The 30-year bond ended down 18/32, to yield 6.55%.
Traders said overall market sentiment remains positive and they expect yields to remain at or below current levels going into tomorrow's employment report for July.
News from Washington about the fate of the deficit reduction package continued to dominate the market's interest yesterday and hurt the long end.
House members held press conferences throughout the day to discuss progress on the package, which is expected to go up for a vote on Capitol Hill this week.
The market is working under the assumption that the proposed $496 billion plan will pass, and it has already factored it into prices. But news reports and rumors helped create some price volatility throughout the session.
"Every little hiccup out of Washington was good for a quarter point," said Joseph Liro, chief economist at S.G. Warburg & Co.
Liro said the market remains optimistic that the budget will get the green light, but added that most larger accounts are sidelined as the market braces itself for the offchance that President Clinton's much-ballyhooed package will fall short on votes.
Late in the day, Sen. Dennis DeConcini, D-Ariz., said he would vote to support the plan, ending several days of speculation about where the package's one-time opponent would end up.
DeConcini's support increases the bill's prospects in the Senate, and should offset the loss of one-time supporter Sen. David Boren, D-Okla.
Of the six Democratic senators who voted against it the first time around, DeConcini was seen as the most likely to be swayed. Prices swung wildly yesterday on every report or rumor of where he stood on the vote.
Market participants and Democrats were encouraged by concessions that Clinton promised to Democrats. The President appealed to the public to urge Congress to pass his budget plan and agreed to sign a pair of executive orders. One would require that all new taxes be placed in a special deficit-reduction fund. The other would require the President to make necessary adjustments if deficit projections during the next five years are not met.
The market cleared an important hurdle yesterday when the Treasury Department reported a $38.50 billion refunding package. The number was basically in line with market expectations and prompted little market reaction.
The Treasury announced that next week it will auction $11 billion of 30-year notes, $11 billion of 10-year notes, and $16.5 billion of three-year notes.
Some selling pressure emerged as rumors of a smaller-than-expected bond offering failed to materialize, but the market generally yawned at the announcement.
Anthony Karydakis, senior financial economist at First Chicago Capital Markets Inc., said the market is now clear to begin positioning itself for the new supply next week.
Prospects are particularly bright for the long end of the yield curve as next week's auction will inject the last supply of bonds into the market for six months, market participants said.
That drought of long-dated paper should facilitate lower long-term interest rates. "If economic and inflationary conditions remain favorable for the market, less bonds will be a good development for the market," Karydakis said.
The Federal Reserve's "beige book" report showed that in most Fed districts, economic activity continued to expand slowly to moderately in June and in the first half July. It generally portrayed a slow pace of expansion, with weakness in manufacturing offset by strength in housing.
Scott Winningham, chief market analyst at Stone & McCarthy Research Associates in Princeton, N.J., said the report did little more than mirror the market's view of the current economic climate.
"The Fed's report shows that growth is slow and the economy is showing few signs of pickup," Winningham said. "The release just supported the prevailing view and had little effect on prices."
In overnight activity, an attempt during London trading hours to push the yield of the long bond below the psychologically important 6.50% level failed and players took profits.
Concerns over the budget again moved to the forefront at the opening of the New York session. The market became jittery about the budget after DeConcini said in a television interview that he hadn't made a final decision on how to vote on the deficit reduction package, but noted that he was leaning against it.
Prices will remain vulnerable to further losses today should the market receive more bad news about the package, traders said.
Tomorrow's jobs report will provide participants with their first comprehensive view of business activity in July and set the market's tone going into next week's refunding auctions, traders said.
"The employment series will give us an idea where overall market fundamentals stand," said one head trader.
In futures, the September contract ended down 10/32 to 115.14.
In the cash markets, the two-year note was quoted late yesterday down 2/32 at 100.04-100.05 to yield 4.16%; the 5 1/8% five-year note ended down 8/32 at 100.02-100.04 to yield 5.22%; the 6 1/4% 10-year note was down 8/32 at 102.21-102.23 to yield 5.87%; and the 7 1/8% 30-year bond was down 18/32 at 107.11-107.13 to yield 6.55%.
The three-month Treasury bill was unchanged at 3.13%; the sixmonth bill was unchanged at 3.30%; and the year bill was also unchanged at 3.54%. Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.13 3.13 3.086-Month Bill 3.30 3.31 3.191-Year Bill 3.54 3.58 3.402-Year Note 4.16 4.20 3.993-Year Note 4.46 4.46 4.305-Year Note 5.22 5.18 5.037-Year Note 5.51 5.51 5.4210-Year Note 5.87 5.87 5.7730-Year Bond 6.55 6.64 6.67Source: Cantor, Fitzgerald/Telerate