Healthy news on the economy and comments by a central banker yesterday provided investors with more excuses to sell Treasuries.
Prices ended lower across the board, with the 30-year closed down 11/32, to yield 6%.
The market resumed its frantic search for levels at which investors feel comfortable, and prices continued their downward trend. Declines have been gradual as hints of stronger economic growth slowly chip away at the gains of recent months.
With players decidedly mixed on the state of fundamentals, the market remains extremely vulnerable to any bad news on the economy or expectations for higher interest rates.
Yesterday, the market received a fair dose of both when a report from the Commerce Department showed a larger than expected advance in durable goods orders and a Federal Reserve president hinted that signs of stronger growth may lead to higher short-term interest rates.
New orders for durable goods grew 0.7% in September to a seasonally adjusted annual rate of $ 132.8 billion, the third gain in four months. Analysts had expected a gain of no more than 0.3%. The September increase followed a 2.6% increase in August, previously reported as a gain of 2.0%.
The market was also shaken by comments from Dallas Federal Reserve President Robert McTeer suggesting that the Fed would want to take preemptive steps against inflation. Speaking in Houston, McTeer reiterated his belief that Fed policy is appropriately accommodating, but he said that the central bank stands ready to tighten monetary policy if signs of inflation start to emerge.
While McTeer hedged, noting that upcoming tax increases and President Clinton's proposed health-care reform plan will tend to have a depressing effect on the economy, some market players were surprised by the candor of his comments.
"The market is trying to find a comfort zone where it will tolerate stronger growth and it's obvious we haven't found the levels yet," said Joseph Liro, chief economist at S.G. Warburg & Co.
Liro said the market is attempting to warm up to the idea of 3% growth or more in coming months, as well as government-induced inflation as tax increases and health-care reform take effect. Like most observers, Liro believes the market will be able to weather the storm of stronger growth, as long as inflation does not make any waves.
The bond market has already shown its distaste for good news on the economy, selling off on a variety of moderately upbeat economic statistics in recent sessions, including auto and home sales. Yesterday, the 30-year bond fell sharply as players got word of the increase in durable goods orders.
Players interpreted the figures as good news for the U.S. economy -- thus bad news for the bond market -- asserting that the details of the durable goods report looked even stronger than the initial headlines. The report, coupled with other signs of buoyance in the economy, supported the view that some sectors are gaining steam and Treasury prices traded lower right after the release was printed.
Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities, said the overall report was dragged lower by a drop in transportation orders, particularly the historically volatile aircraft orders component.
All major industry groups contributed to the gain in the latest month, except for transportation equipment and instruments, which fell 1.8% in September. Aside from transportation-induced decline, however, Schaja said the release bodes well for the manufacturing sector and for the overall economy.
Particularly distressing to bond market participants is that the manufacturing sector is beginning to show signs of life. Wednesday's durable good report, put together with last week's Philadelphia Federal Reserve survey, has many in the market concluding that the manufacturing sector is doing better.
The Treasury's auction of $11 billion in five-year notes yesterday attracted solid demand and was awarded at 4.81%, with a median bid of 4.80%. The bid-to-cover ratio was solid at 2.75, while the New York primary dealership community took 93.4% of the issue.
The market saw a modest bounce in prices immediately following the release of the auction results, but the move fizzled as no follow-through buying emerged. The prevailing strategy is to sell on upticks to take advantage of small drops in yield. Thus, the attempt to push the market higher after the auction was met with fresh selling pressure, traders said.
Liro voiced surprise at the market's lackluster reaction to the strong auction, but noted that uncertainty ahead of the preliminary report on third quarter gross domestic product made Treasuries less attractive.
The GDP report, to be released today, is the main event of the week. Economists polled by The Bond Buyer expect the figures to show that GDP rose 2.7% in the latest three-month period. Some analysts hold the view that the economy is turning the corner and voiced optimism about gross domestic product growth in coming quarters.
One optimistic report is the Conference Board's latest forecast that the U.S. economy is expected to grow at a 3.0% to 3.5% pace through the end of 1994.
In a release, the board said the better growth environment will be accompanied by a modest pickup in price increases throughout 1994, with the consumer price index growing at 3.5% to 4.0% and producer prices up to 3.0% from about 2.0% in 1993.
In futures, the September contract ended down 11/32 to 118.16.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 6/32 at 99.24-99.25 to yield 3.99%. The 4 3/4% five-year note ended down 10/32 at 99.20-99.22 to yield 4.82%. The 5 3/4% 10-year note was down 12/32 at 102.08-102.12 to yield 5.43%. The 6 1/4% 30-year bond was down 11/32 at 103.08-103.12 to yield 6.00%.
The three-month Treasury bill was down one basis point at 3.08%. The six-month bill was unchanged at 3.19%, and the year bill was up three basis points at 3.34%.Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.08 3.05 3.056-Month Bill 3.19 3.13 3.181-Year Bill 3.34 3.26 3.342-Year Note 3.99 3.82 3.853-Year Note 4.24 4.06 4.175-Year Note 4.82 4.62 4.807-Year Note 5.00 4.79 5.0310-Year Note 5.43 5.23 5.4430-Year Bond 6.00 5.81 6.08Source: Cantor, Fitzgerald/Telerate