This week's slew of Treasury auctions should be absorbed without much difficulty since hopes for another easing in Fed monetary policy will make the short-term paper more attractive to investors, traders and analysts said last week.
This week's $55 billion of supply is all at the short end. The long-term securities to be sold at the quarterly refunding in early August are likely to prove troublesome for the market, traders said.
The auctions begin with the regular weekly sale of $20.8 billion of three- and six-month bills today, followed by $12.5 billion of two-year notes tomorrow, $9.25 billion of five-year notes Wednesday, and $12.5 billion of year bills Thursday.
The four auctions will raise a total of $17.3 billion of new cash, with the five-year auction, which used to be held only once a quarter, raising all new money.
A few weeks ago, the rebound in economic statistics had convinced most participants there was no reason for the Federal Reserve to loosen credit again. But some less-than-stellar indicators, including the persistent weakness in money supply growth, have put another easing back into the picture.
"There's ample reason for the Fed to ease at least once this summer," said Brian Fabbri, chief economist at Midland Montagu Bank. "We've got continued evidence there's a credit crisis going on in the banking industry. Money growth remains at a low level and most of the economic data, while growing, is growing at a relatively small rate."
Another Fed easing would be particularly good news for year bills and two-year notes, which track monetary policy closely, so those two auctions should go well, Mr. Fabbri said.
A government note trader said the talk of a double-dip scenario had also contributed to the firm tone at the front end recently.
"The euphoria in the short end won't go away" heading into the auctions, although the issues may cheapen up a little, the note trader said.
Some economists question whether the weak money supply growth says anything about the strength of the recovery.
"The concern over the money supply is premature," said Gary Schlossberg, a senior economist at Wells Fargo Bank. "The weakness in M2 growth is due to a shift out of savings-type deposits, rather than a slowdown in spending."
Mr. Schlossberg said some people are moving funds into stocks and bonds, while other investors are leaving their money in transaction accounts rather than moving it into savings accounts.
"I think hopes for an easing by the Fed on that basis are premature," he added.
Traders said there were other arguments in favor of this week's auctions going well.
"The twos and fives are in the maturity range that retail's been active in recently," a government coupon trader said. "We see a little pressure [as the auctions approach], but not enough to break the market down."
And Mr. Fabbri noted that banks are still eager buyers of short-term paper. "Banks continue to like that area of the yield curve and will probably bid quite heavily for both those issues," he said.
There will be little economic information to alter prices going into the auctions.
This week's numbers include June durable goods orders on Wednesday and the first estimate of second-quarter gross national product on Friday.
"Advance durable goods will be closely scrutinized by the marketplace for signs about the nature and scope of this recovery," said David Resler, chief economist at Nomura Securities. "The last few months, we've seen some very healthy gains, and a continuation of order flows at the pace we've had would be a little surprising for the marketplace."
Forecasts for June durable goods range from a 0.8% decrease to a 4.5% increase.
Treasury Market Yields
Friday Week Month
3-Month Bill 5.73 5.72 5.74
6-Month Bill 5.97 5.92 6.03
1-Year Bill 6.22 6.22 6.33
2-Year Note 6.82 6.84 6.95
3-Year Note 7.26 7.29 7.36
4-Year Note 7.43 7.45 7.54
5-Year Note 7.89 7.89 7.91
7-Year Note 8.13 8.12 8.13
10-Year Note 8.26 8.24 8.26
20-Year Bond 8.42 8.43 8.45
30-Year Bond 8.47 8.43 8.45
Source: Cantor, Fitzgerald/Telerate
Most economists expect a small increase of 1% to 1.5% in secondquarter output, which would be a big improvement from the 2.8% decline in the first quarter. But they said the growth in GNP will not be a surprise to bond traders.
Instead, the detail in the report will be more important than the overall change, economists said, with the trade and inventory numbers likely to receive close attention.
Friday's Market Activity
Treasury prices got a small boost Friday as the weak M2 figure announced late Thursday caused some nervous dealers to cover short positions.
Late in the afternoon, the 30-year bond was down 1/32 to yield 8.47%, while short-term and intemrediate notes were 1/32 to 3/32 higher.
The bigger-than-expected drop in the M2 money supply reported late Thursday, combined with a little retail buying Friday, pushed prices a little higher and put participants with short positions on the defensive, traders said.
"The weakness of the [monetary] aggregates relative to expectations has caused shorts some discomfort and they're covering," a coupon trader said.
Prices might have gone higher if it were not for Friday morning's Philadelphia Fed business survey, which showed business activity improved in July for the third month in a row. The Philadelphia Fed said new orders and shipments were up and inventories were down.
The September bond future contract closed 7/32 higher at 93 17/32.
In the cash market, the 30-year 8 1/8% bond was 1/32 lower, at 96 3/32-96 7/32, to yield 8.47%.
The 8% 10-year note rose 1/16, to 98 3/32-98 7/32, to yield 8.26%.
The three-year 7% note was up 1/16, at 99 8/32-99 10/32, to yield 7.26%.
In when-issued trading, the two-year note to be auctioned tomorrow was bid at 6.89% and the five-year note to be sold Wednesday was quoted at 7.89%.