Good news on the deficit reduction package being tossed around congress helped the Treasury market end yesterday's session on a strong note.
The 30-year bond was the star performer on the yield curve, finishing the session up 13/32, to yield 6.64%.
Speculation about deficit reduction preoccupied the market yesterday. The market came under selling pressure on concerns that some Democrats might withdraw support for the budget plan.
But reports that President Clinton is considering an executive order to control entitlement spending growth gave the market a much-needed lift. The control would probably involve little more than notification of Congress when outlays exceed limits, but the fact that Clinton is focusing on the entitlement problem was encouraging to the market.
The long bond, which had been down as much as 11/32, managed to finish the day in positive territory on the news.
Strong demand for the second round of the Treasury's monthly note auctions this week was also supportive to the market. Sixteen billion dollars in five-year notes was awarded at 5.25%. The bid cover was a respectable 2.77 and non-competitive bids were relatively strong at $635 million.
"The budget news and the auction results helped us end strong after declines this morning," said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp.
In overseas trading, the intermediate and long sectors of the curve came under selling pressure in Asia and London on concerns about the passage of Clinton's budget.
That weakness carried over into the New York trading session and was exacerbated by an attempt by market participants to build a concession into the five-year note ahead of the auction.
A 3.8% increase in durable goods orders for June added further selling pressure. Most analysts were looking for an increase in the neighborhood of 1.0%.
David Wyss, chief financial economist at DRI/McGraw Hill, said a swing in the volatile transportation component was behind much of the rise in orders. But overall, "the data confirm our opinion that we'll get slightly more strength in the second quarter of the year," Wyss said.
One head trader agreed that the durable goods report, coupled with other recent signs of economic growth, supported the view that the U.S. economy continues to expand, and he said those indicators will weigh on the minds of market participants as the market approaches the quarterly refunding.
"With more supply on the way, the economy improving, and inflation picking up, the market is paying closer attention to every piece of data that comes out," said Tony Crescenzi, head fixed-income trader at Miller, Tabak, Hirsch & Co.
The market still has a few hurdles to clear this week before participants can get a firm grasp on overall market fundamentals.
One is today's preliminary report on gross domestic product for the second quarter, which will provide the market with its first comprehensive look at economic activity in the first half the year. Of particular interest will be the fixed weight deflator contained within the overall release, as the market is especially sensitive to signs of upward price pressure these days.
Analysts polled by The Bond Buyer generally expect a 2.2% increase on overall GDP and 2.8% rise in the deflator.
"The market will take a close look at GDP and then at the employment report next week to see where it's headed," said Jim Winder, money market economist at Merrill Lynch Capital Markets.
Initial claims may also attract some interest, with most economists forecasting an increase of 25,000 claims, after last week's increase of 24,000. But economists cautioned that the number is likely to be skewed higher by floods in the Midwest and the General Motors plant shutdown, and thus will not provide the market with a clear view of activity in the employment sector.
Supply is likely to once again move to the forefront next week ahead of the Treasury's quarterly refunding announcement.
In other news, a federal judge ruled yesterday that former Salomon Brothers trader Paul Mozer, who was indicted for his role in the 1991 Treasury securities bidding scandal, can plead guilty to lesser charges.
According to court papers released today, U.S. District Judge Pierre Leval ruled that Mozer must be allowed to plead guilty to the terms of the original plea agreement that contained two counts of making false statements.
A spokesman for the firm refused to comment on the ruling.
In the cash markets, the 4 1/8% two-year note was quoted late yesterday Up 2/32 at 100.02-100.03 to yield 4.20%; the 5 1/8% five-year note ended up 5/32 at 99.21 -99.23 to yield 5.18%; the 6 1/4% 10-year note was Up 5/32 at 102.21-102.23 to yield 5.87%; and the 7 1/8% 30-year bond was up 13/32 at 106.02-106.04 to yield 6.64%.
In when-issued trading, the five-year note -- to be auctioned Wednesday -- was quoted at 99.12.
The three-month Treasury bill was down two basis points at 3.09%; the six-month bill was down two basis points at 3.24%; and the year bill was down one basis point at 3.46%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.13 3.12 3.066-Month Bill 3.31 3.27 3.201-Year Bill 3.58 3.48 3.432-Year Note 4.20 4.12 3.993-Year Note 4.46 4.45 4.315-Year Note 5.18 5.16 5.037-Year Note 5.51 5.50 5.4210-Year Note 5.87 5.83 5.7730-Year Bond 6.64 6.65 6.67Source: Cantor, Fitzgerald/Telerate