Treasury prices fell yesterday after Federal Reserve Chairman Alan Greenspan's optimistic comments on the economy discouraged traders who hoped the Fed would cut interest rates again.
Late yesterday, the 30-year bond was off 1/2 point to yield 8.38%. That is the highest closing yield on the long bond since mid-March
Addressing a meeting of international bankers in Osaka, Japan, Mr. Greenspan said the last 10 days' worth of statistics showed the U.S. economy is "moving toward first stability, and some recovery."
The chances for a "a stronger-than-expected recovery" are "rising slightly," Mr. Greenspan said, and he cited evidenc eof inventory liquidation as a good sign.
The Fed chairman also said he expects the inflation rate coming out out of the recession to be "lower than when we went in."
"I don't think he suggested the economy's about to recover, but he certainly took a much more optimistic view of the likelihood of a future pickup in activity," said Henry Engler, an economist at Chemical Securities.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.77 5.60 5.63
6-Month Bill 5.96 5.86 5.88
1-Year Bill 6.25 6.07 6.11
2-Year Note 6.80 6.59 6.81
3-Year Note 7.22 7.04 7.10
4-Year Note 7.44 7.27 7.31
5-Year Note 7.83 7.65 7.66
7-Year Note 8.04 7.91 7.89
10-Year Note 8.17 8.05 8.03
20-Year Bond 8.38 8.29 8.22
30-Year Bond 8.38 8.28 8.22
Source: Cantor, Fitzgerlad/Telerate
Mr. Engler said the Fed chairman's remarks echoed similar statements on Tuesday by Robert T. Parry, president of the San Francisco Fed, and Fed Governor Edward W. Kelley.
Taken together, the comments by Fed policymakers "don't seem to suggest any further easing is necessary at this point," he said.
Mr. Engler said it was interesting that the bond market had focused on Mr. Greenspan's comments about a rebound in the economy, but seemed to ignore his positive outlook on inflation.
Lower inflation rates should benefit the long end, where inflation expectations play a big role in pricing, but long-term prices suffered equally with the short end yesterday.
The apparent overreaction at the long end might be due to supply considerations, Mr. Engler said. "They do have a lot of Treasury financing between now and the end of the year."
Maureen O'Toole, director of research at Rodman & Renshaw, said she thought the market had already built in expectations that inflation would improve and used those expectations as a justification for more Fed easing.
Mr. Greenspan's comments "took away that optimism about another potential easing," she said.
Still, Ms. O'Toole said, prices have been sliding for the last week and a half as the market tried to take into account the improvement in the economy. "The Fed certainly isn't going to tighten, so there comes a point where you've overdone it."
She said that if Treasuries decline again today, the market might manage to rally tomorrow if May nonfarm payrolls fall by 110,000 job or more.
Economists surveyed by The Board Buyer on average expect an 82,000 decline in May payrolls, following the 124,000-job drop in April.
Yesterday's sell-off started overnight in Tokyo and continued through the Londn and New York sessions.
Prices reached new lows in New York during the morning when the September bond futures contract broke through a technical support level at 94 27/32.
"We broke through some support, but somehow we held," a government note trader said.
The curve flattened in London as short-term prices fell more rapidly than the prices of intermediate and long-term paper, but that move was reversed at the start of the New York session, a coupon trader said. "At the get-go there was better buying in the front end."
The note trader said the front end was getting a bid from the technical situation in two-year notes, which are still expensive to borrow.
The market ignored the revision to first-quarter productivity, which fell to a 0.3% gain from the 1.0% reported last month.
This morning, the weekly jobless claims may give the market a small preview of tomorrow's number.
Ms. O'Toole said the market will focus on the continuing claims information, which will be for the same week the unemployment survey was taken. In recent weeks, continuing claims have risen even though the number of new claims has stabilized.
"If we were to see a significant increase in the people actually receiving jobless benefits at the state level, that's important," she said.
The September bond future contract closed 1/2 point lower, at 93 23/32.
In the cash market, the 30-year 8 1/8% bond was 9/16 lower, at 97-97 4/32, to yield 8.38%.
The 8% 10-year note fell 3/8, to 98 22/32-98 26/32, to yield 8.17%.
The three-year 7% note was down 5/32, at 99 11/32-99 13/32, to yield 7.22%.
Rates on Treasury bills were higher, with the three-month bill up four basis points at 5.62%, the six-month bill up one basis point at 5.72%, and the year bill two basis points higher at 5.90%.
Markey Asks About Squeeze
Edward Markey, chairman of the House Subcommittee on Telecommunications and Finance, asked administration officials last week to comment on reports of a short squeeze in the two-year Treasury note.
Mr. Markey, D-Mass., sent letters to Richard Breeden, Chairman of the Securities and Exchange Commission, Nicholas Brady, Secretary of the Treasury, and Fed Chairman Greenspan.
He asked whether a short squeeze had taken place and if so, whether government regulators had enough authority to address the problem.
The price of the current two-year note soared in the trading sessions after its auction on May 22 amid rumors that a few big players were controlling the issue.
"Does this recent activity highlight any need for new regulatory or legislative action in the context of the GSA reauthorization?" Mr. Markey asked.
Mr. Markey's subcommittee is considering reauthorization of the Government Securities Act of 1986.