Treasuries managed to end yesterday's session in positive territory after treading water for much of the day as market participants braced for crucial economic reports.
Despite the market's cautious tone, a late afternoon short covering spree lifted prices across the curve. The 30-year bond closed unchanged at a yield of 7.58%, while the two-year note ended up 3/32, to yield 6.15%. Healthy bidding at the second leg of the Treasury's August refunding gave players reason to cheer yesterday. The 10-year note auction, which was widely thought to be the most difficult issue to sell, met with decent demand and encouraged participants that buyers are coming back into the bond market.
Treasury Market Yields Prev. Prev. Wednesday Week Month 3-Month Bill 4.44 4.40 4.506-Month Bill 5.05 4.86 4.991-Year Bill 5.52 5.31 5.462-Year Note 6.15 5.92 6.183-Year Note 6.54 6.19 6.505-Year Note 6.92 6.68 6.997-Year Note 7.09 6.85 7.1810-Year Note 7.28 7.07 7.3830-Year Bond 7.56 7.37 7.67 Source: Cantor, Fitzgerald/Telerate
But instead of pushing government securities prices significantly higher, dealers opted to remain cautious ahead of today's long bond auction and this week's remaining economic reports. Investors remain wary of purchasing securities a week before most expect the Federal Reserve to raise short-term rates, dealers said.
"The market is pleased that the first two legs of the refunding have gone okay, considering that we are going into important data this week," said Tony Crescenzi, head of fixed income at Miller, Tabak, Hirsch & Co. "It appears there's no real supply overhang at this point."
The U.S. Treasury's $12.0 billion 10-year note auction met with decent demand yesterday, as shown by the lack of a tail, or difference between the 7.33% average and high yields.
Market participants are cautiously optimistic about today's auction of $11 billion of 30 1/4-year bonds. A growing number of fixed-income observers believe recent price declines have backed up yields enough to ensure buying interest at the refunding.
But others think accounts will avoid bidding aggressively on the bond in hopes of buying the issue cheaper once the central bank tightens. The long bond is widely thought to be the issue that has the most to gain from another tightening of monetary policy. Scarcity value is likely to be another boon for the 30-year issue, given that the maturity is now sold only twice a year.
While the success of the third leg of the refunding is important to the bond market, the strength of the economy and its impact on inflation and Fed policy remain the market's chief concerns, dealers said. Supply, while an important indication of investor attitudes and of the market's ability to absorb new government debt, is a short-term concern for the market.
"The auction results so far this week were sufficient to release the supply burden going into the reports, which are the most important events of the week," Crescenzi said.
Bond market players are particularly anxious to see the July inflation series to get a read on overall price pressures in the national economy. Today's producer price index and tomorrow's consumer price index are likely to play a crucial role in the Fed's deliberations about monetary policy at next week's Federal Open Market Committee meeting.
Economists polled by The Bond Buyer generally expect the PPI to increase by 0.4% for the overall report and 0.3% for the core rate. The overall PPI rate declined by 0.1% in June.
Bill Sharp, an economist at Smith Barney Inc., estimates that prices of finished goods accelerated in July, leading to increases of 0.3% in both the total and core PPI. Higher energy prices should be offset by a drop in food prices, Sharp said, noting his belief that energy prices posted a 1.2% gain in July on the back of higher gasoline, oil, and natural gas prices. Food prices, he projects, declined 0.5% in July.
Faced with contrasing data, many analysts believe the Fed will likely err on the side of tightening, noting that Fed chairman Alan Greenspan has said as much. Given the thin margin of slack remaining in the labor and product markets, the Fed's tolerance for growth much in excess of the economy's long-run potential is, and should be, razor thin, they said.
The market did not react noticeably yesterday when Greenspan told a House panel that by the time the consumer price index shows inflation, it can be costly to rectify. However, he noted that commodity prices and other signals are key to the inflation forecast, and that there is no single rule available for the Fed to target. He also said most price indexes overstate inflation.
In the futures market, the September bond contract ended unchanged at 102.28.
In the cash markets, the 6 1/8% two-year note was quoted late yesterday up 3/32 at 99.29-99.30 to yield 6.15%. The 6 7/8% five-year note ended up 3/32 at 99.24-99.26 to yield 6.92%. The 7 1/4% 10-year note ended up 2/32 at 99.19-99.23 to yield 7.28%. The 6 1/4% 30-year bond ended unchanged at 84.15-84.19 to yield 7.56%.
The three-month Treasury bill ended down seven basis points at 4.44%. The six-month bill closed down five basis points at 5.05%. The year bill ended down four basis points at 5.52%.
The primary market for corporate securities virtually ground to a halt yesterday as issuers and investors wondered how this week's deluge of government supply would affect the broader fixed-income markets. Still, yesterday saw two straight debt issues.
LaRoche Industries Inc. offered $100 million of 10-year senior subordinated junk notes to yield 13%, according to lead manager Chase Securities Inc. The size of the issue was cut from a previously planned $125 million.
The notes, noncallable for five years, were priced at par. They are rated B3 by Moody's Investors Service and B by Standard & Poor's Corp.
Health O Meter Inc. priced $70 million of senior subordinated junk notes to yield 13%, according to lead manager Donaldson, Lufkin & Jenrette Securities Corp.
The notes, noncallable for five years, were priced at par and rated B3 by Moody's and B-minus by Standard & Poor's.
In the secondary market for corporate securities yesterday, spreads of investment-grade issues widened by about 1/8 of a point, while high-yield bonds generally held steady.