Strong institutional demand yesterday for the U.S. Treasury's five-year note auction helped the government securities market sustain a rally that was on the brink of faltering.
Instead, the 30-year Treasury bond finished 30/32 higher to yield 7.45%.
The Treasury sold $11.01 billion of five-year notes via Dutch auction at a yield of 6.91%. The coupon rate on the securities, which mature Aug. 31, 1991, is 6 7/8%. The bid-to-cover ratio was 3.22 to 1, which compares with a 12-auction average ratio of 2.68 to 1. Noncompetitive bids totaled $809 million. "Some of the cash that has been sitting on the sidelines was put to work," said Kathleen M. Camilli, chief economist for MFR Inc. in New York, a global economic and investment advisory firm.
Fence-sitting institutional investors who have been awaiting a rally since the Federal Reserve raised short-term interest rates last week took a stand at the auction, Camilli said.
Market gains eroded Tuesday by the U.S. dollar's poor performance were recaptured early yesterday as the long bond moved about 10/32 higher on news of a weaker than expected July durable goods report.
The Commerce Department reported that new orders for durable goods fell 4.2% in July, the biggest drop since December 1991. The largest declines were seen in the defense sector, 16.4%, and in the transportation sector, 15.8%.
The consensus expectation had been for a July orders increase of 0.4%.
Gains in Treasuries began to erode as many market participants discounted the poor durable goods report, pointing out that a summer shutdown by the auto industry skewed that sector's performance.
"The reaction in the first two minutes was euphoric, then the market lost it," one participant said. "Then the market battled back all the way until the auction," the dealer added.
A two-week shutdown of the auto industry for maintenance and vacations resulted in a huge drop in transportation orders, said Brian S. Wesbury, chief economist for Griffin, Kubik Stephens & Thompson Inc. in Chicago.
In addition, defense orders moved back down in July after above-average orders in May and June, Wesbury said. The economist estimated that after excluding the declines in autos and defense, durable goods orders rose 0.6% in July.
"The durable goods numbers are notoriously volatile and it is not appropriate to assume that one month's numbers are the beginning of a trend," Wesbury said.
Ahead on the economic calendar, second-quarter gross domestic product figures are due out tomorrow.
In the corporate sector, prices of most securities ended higher, as the market was encouraged by the government sector's strong performance. Prices of investment grade corporate securities rose as much as 1/8 to 3/8 point, with some issues posting gains of as much as 1/2 to 3/4 point. Meanwhile high-yield bonds ended flat to about 1/2 point higher on low volume.
The most active issue during the session was Viacom Inc. Prices of the bonds rose as much as five points from Tuesday's close on news that the board of Blockbuster Entertainment Corp. approved a merger with Viacom.
In rating action, Moody's Investors Service raised the rating on NWA Corp.'s $200 million senior unsecured notes to B3 from CAA. The upgrade for NWA, the parent of Northwest Airlines, was based on continued improvement in Northwest Airline's operating and financial performance following a restructuring and an improved outlook for airline traffic growth, offset by a sequence of asset transfers, Moody's said. Treasury Market Yields Previous Previous Wednesday Week Month 3-Month Bill 4.63 4.67 4.546-Month Bill 5.05 5.10 5.021-Year Bill 5.54 5.52 5.542-Year Note 6.18 6.14 6.213-Year Note 6.45 6.45 6.485-Year Note 6.83 6.82 6.967-Year Note 7.01 6.98 7.1310-Year Note 7.19 7.15 7.3230-Year Bond 7.45 7.39 7.60
source: Cantor, Fitzgerald / Teterate