The Treasury market found its stride yesterday as buyers stepped up to take advantage of attractive yield levels brought on by the recent sell-off.
Issues ended the session in positive territory yesterday, led by the 30-year bond, which closed up 5/32, to yield 5.83%.
Treasuries amassed solid support yesterday, underpinned by the belief that inflation is low and the economy continues to navigate a slow growth path.
Prices weakened in early trading on a stronger-than-expected housing starts report, which raised fears that the housing sector is showing signs of life. The selling extended Monday's sharp price declines as the market sought to find a new trading range that all participants were comfortable with.
But in what has become a recurring theme for Treasuries, the selling merely pushed yields higher and brought buyers back into the market. Fixed-income investors were able to shake off the effects of the housing starts report and purchased government securities, particularly at the long end of the curve.
Price movements yesterday came primarily at the hands of short-term day traders' attempting to create volatility in the market and force players to come in and protect their positions. A lack of fresh news or incentives to trade the market kept most long-term players at bay.
Technical traders were another active group in the market as the December bond contract found solid support near 120.18 and players covered short positions, propelling futures prices higher. Late in the session, technicians made a half-hearted attempt to break through 121.05.
Players in the cash market spent the better part of the day monitoring price movements, as there was little impetus to establish new positions or square existing ones.
"There was no news to focus on and guys were just selling on weakness and buying on strength," said Bill Feezer, head government trader at Sanwa-BGK Securities Co.
Like most players, Feezer read Monday's sharp declines as a necessary correction following the market's recent bullish run, which pushed prices higher and yields to record lows.
The long end outperformed the rest of the market yesterday as some accounts put on yield curve flattening trades in a move to extend out to the longer maturities, dealers said. With monetary policy firmly on hold for the time being, dealers said the greatest opportunity for capital gain exists at the long end of the curve.
The intermediate sector got a lift from municipal defeasance, which materialized after price volatility that followed the housing starts report subsided.
Starts rose 2.8% to a 1.351 million units rate in September, stronger than expectations for a reading of 1.30 million units. The figures were consistent with the improving outlook for housing.
Starts of single-family homes fell 3% in September on the back of a 10.5% surge in August, while multifamily starts rebounded 52% after the 18% drop last month.
Market economists were somewhat mixed on their interpretations of the data. Some argued that the housing starts data provided evidence that interest rate-sensitive sectors of the economy are improving, while others discounted the housing activity as anticipatory building ahead of the winter.
"The report shows we're finally seeing the improvement in housing that we've been waiting for," said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp. Schaja was cheered by the sharp increase in multifamily starts and downplayed the decline in the single-family sector as a correction of last month's increase.
But Steven Ricchiuto, chief economist at Barclays de Zoete Wedd Securities, argued that the surge in multifamily starts reflects a mad dash among home builders to get construction projects underway before the winter months.
"Builders are seeing that interest rates are coming lower and they're hoping for some demand down the road," he said. Ricchiuto disappointed by the decline in the single-family category, given that mortgage rates are at their lowest levels in a generation.
But even though some interest rate-sensitive sectors of the economy are displaying signs of strength, market observers believe growth will remain slow and that the resulting positive inflation environment will keep Treasury yields from rising significantly into 1994. That belief goes against the tide of public sector economists who have predicted a robust fourth quarter and stronger economic activity in 1994.
Among those market observers predicting that fundamentals will continue to support the bond market Donald Fine, chief market analyst at Chase Securities, believes that 2.5% to 3% -- the range within which most Wall Street economists expect growth will come in -- faster growth in the fourth quarter will be unsustainable.
"There are a number of factors which will tend to hinder any acceleration of economic growth next year," fine said, noting that they include uncertainty over upcoming health-care reform and higher taxes, ongoing corporate restructuring, the scale-back in the defense industry, the weak commercial real estate market, residual effects of over zealous banking regulations, and the lack of new and innovative consumer product.
Expectations for widespread bank prime rate cuts simmered down yesterday as no other money center banks followed Morgan Guaranty's move to cuts its prime from to 5.50% from 6% Monday. Bank analysts still say, however, that other large banks are likely to slash their key lending rates in the near term.
Washington gave other banks the nod to slash rates yesterday when President Clinton told reporters that he was "encouraged" by the decision to lower the prime interest rates by at least one big bank.
The market did receive word from one New York-based money center bank. The new chairman and chief executive officer of Chemical Banking Corp., Walter V. Shipley, announced yesterday that the bank currently has no plans to cut its prime. He said lower commercial lending rates would do little to stimulate loan demand at this stage of the business cycle.
In other Wall Street news, Goldman, Sachs & Co. reported yesterday that E. Gerald Corrigan, formerly the president of the New York Federal Reserve, will be joining the firm, effective Jan. 3.
Corrigan will be chairman of the firm's international advisers.
Treasury market participants applauded Goldman's acquisition, noting that the firm hired a problem-solver with a keen understanding of international affairs.
Corrigan, who stepped down from heading the New York Fed on July 18, is an expert on Russia and will continue to serve as non-executive chairman of the Russian-American Enterprise Fund, to which he was appointed by Clinton earlier this year.
In futures, the September contract ended up 5/32 to 121.02.
In the cash markets, the 37/8% two-year note was quoted late yesterday unchanged at 100.02-100.03 to yield 3.82%. The 4 3/4% five-year note ended up 1/32 at 100.14-100.16 to yield 4.63%. The 5 3/$% 10-year note was up 1/32 at 103.23-103.27 to yield 5.24%. And the 6 1/4% 40-year bonded was up 5/32 at 105.22-105.26 to yield 5.83%.
The three-month Treasury bill was unchanged at 3.06%, the six-month bill was unchanged at 3.14%, and the year bill was up one basis point at 3.27%.TREASURY MARKET YIELDS Prev. Prev. Tuesday Week Month3-Month Bill 3.06 3.01 3.036-Month Bill 3.14 3.12 3.161-Year Bill 3.27 3.22 3.362-Year Note 3.82 3.79 3.893-Year Note 4.06 4.05 4.205-Year Note 4.63 4.62 4.776-Year Note 4.80 4.80 4.9710-Year Note 5.24 5.25 5.3830-Year Bond 5.83 5.91 5.97Source: Cantor, Fitzgerald/Telerate