A decent two-year auction and a couple of weak economic reports helped most Treasury prices inch higher yesterday, even though the market remains nervous about the possibility of federal tax cuts.
Late in the day, the 30-year bond was up 1/4 point to yield 8.07%.
"The market has become more cautious," said William Griggs, a managing director at Griggs & Santow Inc. "It's taking a defenisve view in light of the talk of fiscal stimulus."
More politicians yesterday joined in the clamor for some kind of tax cuts to stimulate economic growth. The bond market is worried that such tax cuts would add to the deficit, increase inflation pressures, and prevent the Fed from easing monetary policy.
Traders said the market's caution was reflected in yesterday's thin trading flows, which resulted in choppy price action.
"The long end rally whipped around on very little volume today," said Jay Goldinger, a principal at Capital Insight Inc. in Los Angeles. "I think the downdraft scared a few people."
The Treasury's auction of $13.5 billion fo two-year notes went well, but was not a runaway success, traders and analysts said.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.16 5.09 5.30
6-Month Bill 5.30 5.21 5.41
1-Year Bill 5.39 5.26 5.50
2-Year Note 5.98 5.84 6.10
3-Year Note 6.24 6.11 6.36
4-Year Note 6.37 6.27 6.56
5-Year Note 6.96 6.79 7.05
7-Year Note 7.35 7.14 7.37
10-Year Note 7.66 7.44 7.56
15-Year Bond 7.88 7.72 7.78
30-Year Bond 8.07 7.88 7.89
Source: Cantor, Fitzgerald/Telerate
The notes were sold at a 6.01% average and will bear a 6% coupon, down from the 6.14% average and 6 1/8% coupon at the September two-year auction. That 6.01% average is the lowest since May 1977, when the Treasury sold two-years at a 5.77% average.
The auction results were mixed. The price on the notes was a little better than expected: traders thought some bids would be awarded at 6.02%, but 6.01% was both the average and the highest bid accepted.
On the other hand, the total of bids submitted was only $33 billion, less than 2 1/2 times the size of the issue. That suggests there was not much retail interest in the notes, since total bids for two-year sales usually run about three times the issue's size. The $872 million of noncompetitive bids was also below average.
"It looks as if a lot of it is in dealers' hands," said Martin Mauro, a senior economist at Merrill Lynch Capital Markets.
Mr. Griggs said even if dealers got more two-years than they wanted, they probably were not too concerned. "Certainly, the Fed's not going to firm, so the short end isn't going to move much, and you've still got a carry profit and some days to move [the two-year notes] before you have to pay for them."
By late in the day, the price on the when-issued notes had risen slightly and pushed the yield down to 6%.
Yesterday's economic indicators drew little response from the market, and traders said that showed the kind of mood it was in, since the reports looked favorable for the bond market. Mid-October car sales were mediocre and the Federal Reserve's "beige book" was weaker than expected.
According to the Fed report, the U.S. economy was "weak or growing slowly," with retail sales showing "little improvement" in most districts and actually slowing in a few areas. The Fed also said auto sales were "flat or down" in many areas and the outlook for this year's holiday shopping season was described as "cautious."
"The tone of this report is weaker than the tone of the previous report," said Stephanie Murphy, an economist at Manufacturers Hanover.
Ms. Murphy said the bond markets recent sell-off, the state of the yield curve, and talk of tax cuts would all prevent the Federal Reserve from easing monetary policy immediately, but she added that "the underlying economic conditions are sure to make them retain their bias toward easing."
Mr. Mauro agreed that the report painted a bleaker picture of the economy.
In particular, it suggested that two areas economists had been counting on to aid the recovery -- retail demand and inventory rebuilding--were not panning out, he said.
The beige book "doesn't offer much hope of a turnaround in consumer spending and some retailers said inventories were too high, which cast doubt on the idea inventories are going to be rebuilt in any way," Mr. Mauro said.
The market got a little more information on consumer demand yesterday when auto companies reported another 10 days' worth of lackluster car sales.
After a long wait while General Motors fixed its computers, the market learned that cars sold at a 6.2 million annual rate in mid-October. Although that is better than the sorry 5.5 million rate during the first 10 days of the month, it just about matches the mediocre pace in recent months.
Traders said the two-year auction suggests the five-year notes may neet to back up a little going into today's auction. Late yesterday, the when-issued five-years were quoted at 6.97%.
But a lot will depend on this morning's September durable goods report.
"If we get a weakish durable goods number, the five-year probably gets a reprieve and does reasonably well," Mr. Griggs said.
Economists surveyed by The Bond Buyer expect a 0.6% decline in durables orders.
The December bond future contract closed 5/32 higher at 97 26/32.
In the cash market, the 30-year 8 1/8% bond was 1/4 point higher, at [100.sup.15.UF32-100 19/32], to yield 8.07%.
The 7 7/8% 10-year note was unchanged, to 101 9/32-101 13/32, to yield 7.66%.
The three-year 6 7/8% note was up 1/32, at 101 17/32-101 19/32, to yield 6.24%.
In when-issued trading, the five-year note to be auctioned today stood at 6.97%.
Rates on Treasury bills were mixed, with the 3-month bill steady at 5.05%, the 6-month bill unchanged at 5.11%, and the year bill down three basis points at 5.12%.