Weak economic data boosted prices yesterday and helped hand the Treasury another well-bid auction.
The 30-year bond finished the day up 1/4, to yield 7.81%.
Virtually all of the gains came at the start of the session, when the Commerce Bureau reported that new orders for durable goods dropped 2.4% in May to $119.5 billion, the first decline for the volatile indicator in three months.
Economists expected a 0.8% increase for last month, following April's 1.4% rise.
The report shows the largest single-month decline since December, when orders fell 5.3%. The transportation sector was hit hardest, falling 6.2%.
Michael Niemira, an economist at Mitsubishi Bank, said the report was "very disappointing."
"Durable goods is always a volatile indicator," Mr. Niemira said. "The May report was heavily influenced by cuts in transportation spending, defense, and untimely closings of auto plants.
"Regardless, most of us expected the number to improve," he said.
Kevin Flanagan, a money market economist at Dean Witter Reynolds Inc., said yesterday's durable goods number "calls into question the vigor of the recovery process" because it is a leading indicator and showed across-the-board weakness for May.
He noted that the unfilled orders category of the report has shown ongoing declines.
"That's a strong indication of no pent-up demand or orders in the pipeline," Mr. Flanagan said. "It's another piece of evidence that will put pressure on the Fed to consider another ease soon."
Market participants said the improved tone resulting from the durable goods report helped yesterday's five-year note auction.
The $10.5 billion in notes were sold at an average rate of 6.43% and will bear a 6 3/8% coupon. Last month's auction resulted in a 6.75% yield and a 6 3/4% coupon.
Mr. Flanagan said the results were good, but not great. "I wouldn't call it a banner affair," he said. "It was the kind of auction that wouldn't have a material effect on trading. For the most part, any support came from the weaker-than-expected durable goods report."
Non-competitive bids at the auction were $1.095 billion, up from $872 million in May and the highest since 1983, according to Mr. Flanagan. The bid-to-cover ratio was 2.76 to 1, the best showing since February.
The market signaled good demand for the notes by bidding up prices in the secondary market after auction. In late trading the notes were yielding 6.40%.
Tuesday's $15 billion of two-year notes were sold at an average rate of 5.11% and will bear a 5% coupon. That is the lowest yield since January, when two-year notes were sold at 4.99%.
Yesterday the two-years traded up 3/16 at 100.01-100.02, to yield 4.96%.
Adding a bit to yesterday's firm tone was an article in The New York Times that quoted President Bush calling for another Fed ease.
"He has been calling for lower interest rates all along," Mr. Niemira said. "But one indicator, especially one as choppy as durable goods, will not be enough for the Fed to ease."
Mr. Niemira said an ease would have to wait until more wide-scale signs of weakness appear, and would not be justified by one month's durable goods result.
Other market participants speculated that the president's remarks might even backfire, because the Fed would not want to appear responsive to such blatant political pressure by quickly lowering rates.
Auto sales for the June 11 through June 20 period came in close to expectations yesterday, showing a 6.4 million annual rate. That is off a bit from the 6.5 million annual rate from early June.
The September bond futures contract closed 15/32 higher at 100 15/32.
In the cash market, the 30-year 8% bond was 9/32 higher, at 101 30/32-102 02/32, to yield 7.81%.
The 7 1/2% 10-year note rose 7/32, to 102-102 4/32, to yield 7.19%.
The three-year 5 7/8% note was up 5/32, at 101 5/32-101 7/32, to yield 5.41%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.65%, the six-month bill down five basis points at 3.73%, and the year bill eight basis points lower at 3.92%.
Today features a full slate of economic news. Scheduled for morning release are the final revision of the first quarter's gross domestic product, May existing home sales, and initial claims for unemployment for the week ended June 13.
The Federal Reserve is also scheduled to hold its weekly money supply news conference in the afternoon.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 3.71 3.68 3.76
6-Month Bill 3.83 3.81 3.95
1-Year Bill 4.06 4.06 4.18
2-Year Note 4.96 4.92 5.24
3-Year Note 5.41 5.46 5.80
4-Year Note 6.37 6.38 6.69
5-Year Note 6.38 6.39 6.72
7-Year Note 6.78 6.80 7.07
10-Year Note 7.19 7.20 7.41
15-Year Bond 7.49 7.49 7.67
30-Year Bond 7.81 7.81 7.89
Souce: Cantor, Fitzgerald/Telerate