Treasury prices declined yesterday when traders ignored some friendly economic indicators and worried instead about the huge quantity of corporate debt hitting the marketplace.
Late in the day, the 30-year bond was 3/4 point lower and yielded 7.31%, after having been down as much as a full point during the afternoon.
Even though the market managed to bounce off its lows, traders said sentiment is gloomy.
Yesterday's session seemed to start out well when the government reported a weaker-than-expected 0.5% decrease in August retail sales and only a 0.2% rise in the core rate of August consumer prices, excluding food and energy costs.
But Treasury prices, which had already started to slip in London trading, moved steadily lower in early New York activity even though the economic news should have been favorable for the bond market.
Traders said the deluge of new corporate issuance was one factor troubling the Treasury market.
The new lows in interest rates reached last week have lured corporate issuers into the market. They sold about $3.8 billion of new paper yesterday, including a giant $2 billion issue from the Province of Ontario.
"There's far more product hitting the market than is leaving it, and it's leading to selling that feeds on itself," the head of a Treasury trading desk said. "We haven't reached the level that will clear the market to legitimate buyers."
Traders pointed in particular to the Ontario deal, which was rumored to be going poorly. That put downward pressure on Treasury five-year notes, they said.
"The isssue wasn't selling very well, so they had to hedge by selling [Treasury] five-years," a government coupon trader said.
The underwriters of the Ontario deal said there was good demand for the issue.
A bond trader said he thought more than corporate issuance was ailing the Treasury market and described yesterday's shift in sentiment as a "sea change."
For the first time in a while, participants are more interested in selling securities when prices rise than in buying paper when the market dips, he said.
The trader said that in the absence of any other news, the mood change may have occurred in response to reports by SOMC technical analysts that the market has seen a top.
Jim Donnelly, chief technical analyst at Technical Data, is one analyst who believes the rally has reached its limit. Technical Data is a subsidiary of Thomson Corp., which also owns The Bond Buyer.
Mr. Donnelly said Elliott Wave analysis indicates the December bond contract's 107 8/32 high in overnight trading Sunday was the top for this cycle. The fact that two-five-and seven-year notes have all reached the highs predicted by the "measured move objectives" method of analysis is additional evidence that the rally has topped out, he said.
Mr. Donnelly added that the market's recent inability to rally on good news also indicates trouble ahead. Prices closed lower Friday despite the good producer price report, and retraced most of their gains Monday in the wake of the Bundesbank's rate cuts.
The bond market's indifferent reaction to good news is "a pretty vivid sign that there are a lot of long positions around and the market needs to go through at least a digestive phase to distribute bonds from weak hands to stronger hands," he said.
In fact, Mr. Donnelly said there is a better chance the market will move lower. He expects the December bond contract, which closed at 105 16/32 yesterday, to reach 104 15/32 by October, rally, then head back down to 102 16/32. That would be the equivalent of a 7 3/4% yield on the cash bond.
But Scott Winningham, chief market analyst at Stone & McCarthy Research Associates in Princeton, N.J., said he is reluctant to decide the rally is over without more evidence.
"We've had two days of sell-off in an uptrend that dates back to last spring," Mr. Winningham said. "That doesn't seem to me to be very persuasive evidence."
A bond salesman said participants were also disappointed that the Federal Reserve had not lowered rates in the wake of the Bundesbank's rate cut.
He said the French vote this weekend on the Maastricht accord and the political uncertainty in the United States were other problems weighing on the bond market.
August consumer prices rose 0.3%, when the consensus forecast called for only a 0.2% increase. But the 0.2% core rate, excluding food and energy costs, matched market expectations, and analysts said it was a better indication of how subdued price pressures are right now.
The core rate of consumer prices has risen 0.2% for four months in a row now and is up only 3.5% on a year-over-year basis.
"We see that as confirming our view that inflation is basically not an issue in this economy," said Ram Bhagavatula, chief economist at Citibank.
Economists also noted that medical costs, which have been a persistent problem, rose only 0.4% in August.
August retail sales fell 0.5%, when the market was expecting no change, but that was offset by upward revisions in June and July sales figures. July's change now stands as a 1% increase instead of the 0.5% gain reported last month.
Elias Bikhazi, a money market economist at Deutsche Bank, said the market ignored the indicators because they were old news.
"Even though these numbers are good, we've known that story for a long time and discounted it to a large extent," Mr. Bikhazi said.
Traders said there was little market response to early September car sales or the Johnson Redbook, which were released later in the day.
Early-September car sales came in at a 6 million rate, exactly as economists had predicted and only slightly above the 5.9 million pace in late August. The Johnson Redbook reportedly showed department store sales in the first two weeks of September were running 1.5% above August levels.
The market gets more more news today, including last month's industrial production and capacity utilization reports, July business inventories, and the Treasury's announcement of how many two- and five-year notes it will sell next week.
A bond salesman said the market will pay closest attention to industrial production because Fed officials are known to watch that series.
The consensus forecast calls for 0.4% decrease in industrial production, a 78.5% capacity utilization rate, and no change in business inventories.
The December bond futures contract closed 25/32 lower at 105 16/32.
In the cash market, the 7 1/4% 30-year bond was 23/32 lower, at 99 4/32-99 8/32. to yield 7.31 %.
The 6 3/8% 10-year note fell 15/32, 99 29/32-100 21/32 to yield 6.3 7%.
The three-year 4 5/8% note was down 7/32, at 100 21/32-100 23/32, to yield 4.35%.
Rates on Treasury bills were higher, with the three-month bill up four basis points at 2.93%, the six-month bill up four basis points at 2.94%, and the year bill five basis points higher at 3.06%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 2.97 2.95 3.12
6-Month Bill 3.00 3.00 3.21
1-Year Bill 3.15 3.11 3.32
2-Year Note 3.84 3.78 4.01
3-Year Note 4.35 4.25 4.54
5-Year Note 5.34 5.18 5.41
7-Year Note 5.86 5.74 5.97
10-Year Note 6.37 6.28 6.47
30-Year Bond 7.31 7.21 7.32
Source: Cantor, Fitgerald/Telerate