A surge in precious metals prices took the luster out of the Treasury market yesterday and long-dated paper ended lower across the board.
The 30-year bond ended down 3/8 a point, to yield 6.23%.
Gold and silver prices rallied as demand for precious metals outstripped supply. Spot gold ended at $388.60 per ounce, up $3.70 in New York trading.
Despite last week's good inflation series, upward pressure on commodity prices posed problems for the market, particularly with many Wall Street analysts predicting that commodity prices will rally into year-end. Dealers pushed Treasury prices lower, fearing a spike in commodity prices might fuel inflation.
A retreat in energy prices and the resulting drop in the Commodity Research Bureau's index of commodity prices helped offset the pressure from higher gold prices, but precious metals held the market's focus,
Market observers generally down-played the impact of yesterday's surge in precious metals prices on Treasuries and said that a lack of fresh news on the, economy exaggerated the market's reaction.
"The market is winding down as it enters the Christmas season and I don't think the rate movements have any validity," said Donald Fine, chief market analyst at Chase Securities Inc.
Fine said some of the declines yesterday reflected the hesitance of accounts to place new bets on the market as year-end approaches and ahead of the release of potentially strong economic data this week. The November retail sales report, in particular, will provide the market with trading impetus, he said.
Wall Street economists polled by The Bond Buyer expect today's report to show that retail sales increased by 0.3%.
Market participants remain decidedly mixed on long-term prospects for the U.S. economy. Some observers believe the economy has built up significant momentum and that gross domestic product growth will continue to come in at 3.5% or better next year. Other economists, however, believe that the current acceleration in economic activity will be short-lived and that growth will stall in the first and second quarters of 1994.
Economists optimistic about U.S. economic growth see the current rise in precious metals prices as a negative development for investors which will continue to haunt the Treasury market until the end of the year.
"The rise in gold and silver prices is clearly a confirmation that fears of inflation are carrying more weight these days," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. He attributes higher precious metals prices to the lingering effects of low interest rates, which he said have begun to affect asset prices such as real estate and commodities.
On the other hand, Anthony Karydakis, senior financial economist at First Chicago Capital Markets, Inc., is among the economists who see smooth sailing for the bond market as economic and inflationary growth slow moderate next year.
The absence of a clear consensus has made life difficult for fixed-income investors and prompted many to take a more defensive stance on the market. The likelihood that the Federal Reserve will adopt an asymmetrical stance toward at tightening of monetary policy when its voting members meet next week has also driven investors to search out other arenas in which to put their money in play.
In this environment, Smith Barney Shearson yesterday recommended that investors cut their exposure to the bond market to 30% of their portfolio, from a prior recommendation of 35%.
Smith Barney said investors should increase their cash holdings to 15% from 10%. The recommended equity allocation was kept unchanged at 55%.
The firm's latest investment strategy underscores a trend among portfolio managers to lessen their exposures in the bond market to reduce risk. Realizing that they will be hard pressed to match the stellar performances in the U.S. bond market this year, many money managers say they are shying away from fixed-income investments and putting their money into equities and tax-fee bonds. They argue that stocks and municipal securities will offer a better rate of return than paper backed by the U.S. Treasury and corporations.
William Helman, co-chairman of the firm's investment policy committee, said the economy may be stronger than expected in 1994 and that could lead to increased inflation by year-end.
"If that is the case, we think the Federal Reserve will probably react to that over the course of 1994. So a less favorable monetary situation increases the near-term to intermediate-term risk for financial assets," Helman said.
The three- and six-month bill auctions were reasonably well-bid at average rates of 3.06% and 3.26%, respectively. The issues has bid-to-cover ratios at 4.27 for the three-month and 3.74 for the six-month.
In futures, the March bond contract ended down 13/32 to 116.11.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday unchanged at 100.01-100.02 to yield 4.21%, the 5 1/8% five-year note ended down 2/32 at 99.26-99.28 to yield 5.15%, the 5 3/4% 10-year note was down 7/32 at 99.26-99.30 to yield 5.75%, and the 6 1/4% 30-year bond was down 3/8 of a point at 100.04-100.08 to yield 6.23%.
The three-month Treasury bill was down one basis point at 3.05%, the six-month bill was unchanged at 3.25%, and the year bill was down one basis points at 3.49%. Treasury market Yields Prev. Prev. TuesDay Week Month 3-Month Bill 3.09 3.10 3.106-Month Bill 3.32 3.32 3.241-Year Bill 3.61 3.62 3.382-Year Note 4.21 4.21 4.073-Year Note 4.53 4.52 4.425-Year Note 5.15 5.13 4.987-Year Note 5.31 5.27 5.2210-Year Note 5.75 5.72 5.6430-Year Bond 6.23 6.20 6.15 Source: Cantor, Fitzgerald/Telerate
