Intermediate notes pulled the Treasury market lower yesterday as the indigestion caused by Wednesday's poorly bid five-year note auction led to widespread selling.
But after a session of whipsaw trading, short-term and intermediate note prices closed well above their lows and long-term prices were slightly higher on the day.
Traders attributed the market's partial recovery to good retail buying and the continuing flow of money coming from the mortgage-backed securities market.
Late in the afternoon, the 30-year bond was up 2/32 and yielded 7.43%, while seven-year and 10-year notes were both 1/4 point lower.
The new 5 1/2% five-year note was the worst performer on the curve, down 10/32 on the day to yield 5.71%, far above the 5.56% average at yesterday's auction. That price decline would have meant a loss of about $650,000 for a trader who bought $100 million of the notes at the auction and was still holding onto them 24 hours later.
"Those who bought the auction [Wednesday] are having a very, very serious problem," said Anthony Karydakis, senior financial economist at First Chicago Securities. "Dealers took down the paper at the highs and retail was just not there."
A government note trader said the selling began with five-years and then spread to other notes and bonds because "lower prices tend to bring in sellers."
Treasury prices declined in overseas trading as foreign investors continued the selling that began in New York on Wednesday after the five-year auction results were announced.
The market hit new lows after yesterday morning's mixed bag of indicators were released, but Mr. Karydakis said the economic news was just an excuse for the market to continue its correction.
"The market was overdone as a result of the week-long rally," he said, adding that the lower prices also reflect the fact the prices had not made any adjustment going into the supply.
Certainly prices continued to flip-flop throughout the session. Traders said the price action was choppy and spreads between various maturities seesawed frantically.
Bond traders agreed that the Treasury market, and particularly the long end, had benefited from cash coming in from the mortgage-backed market, where prices have tumbled because of worries about prepayment risk.
"There's too much turmoil in the mortgage markets, and people are scared of the intermediate sector," a bond trader said.
He added that Treasury traders are still constructive despite the volatile price action Wednesday and yesterday.
The trader predicted, though, that prices might need to go lower to reach levels at which the market can take down the refunding supply.
Next Wednesday, the Treasury will announce the sizes of the three- and 10-year note and 30-year bond sales that make up the August refunding. The market expects a $36 billion package.
"In view of the upcoming supply, a little bit more of a concession may be necessary, but I think we are working our way into an overall lower yield range," Mr. Karydakis said. He estimated the 30-year bond was now trading in a 7 1/4% to 7 3/4% range.
Astrid Adolfson, an economist at McCarthy, Crisanti & Maffei, said yesterday's indicators contained something for everyone: "Claims and home sales showed there is some life in the economy, even though the GDP data told us there was no life in the economy last quarter."
Treasury Market Yields
Thursday Week Month
3-Month Bill 3.24 3.20 3.29
6-Month Bill 3.34 3.31 3.43
1-Year Bill 3.56 3.47 3.69
2-Year Note 4.29 4.13 4.55
3-Year Note 4.73 4.57 5.06
5-Year Note 5.71 5.58 6.02
7-Year Note 6.19 6.15 6.48
10-Year Note 6.64 6.70 6.91
15-Year Bond 6.98 7.08 7.24
30-Year Bond 7.43 7.53 7.62
Source: Cantor, Fitzgerald/Telerate
The Labor Department said new claims for unemployment insurance dropped 21,000 to 400,000 in the week ended July 18, the lowest level since Oct. 6, 1990. The market had expected only an 11,000 decline.
The claims report also showed the number of people receiving state benefits fell 143,000, to 3.15 million in the week ended July 11.
But analysts said the drop in claims was offset by the report on the second-quarter gross domestic product, which showed growth remained slow and inflation continued to improve.
Second-quarter output rose 1.4%, a little less than the market expected. That compares to the revised 2.9% growth rate during the first quarter, which was reported as a 2.7% increase last month.
The second-quarter price deflator rose 2.4%, down from the 3.1% increase in the first quarter, and the fixed-weight deflator was up only 1.6%, its lowest reading since the series began in 1982.
She added that the basically flat inventories reading in the second quarter, following a big contraction in the first quarter, suggests inventories could weaken again and subtract from third quarter growth.
Yesterday's other report, June new home sales, showed a 7.9% increase, to an annual rate of 572,000. This was a bit stronger than the consensus forecast of a 5% gain.
Analysts said home sales should do even better in July, given the Fed's rate cuts earlier this month.
By the end of the day, the market was too battered to pay much attention to the money supply numbers.
A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing yesterday that the nation's M1 money supply rose $4.7 billion to $961.6 billion in the week ended July 20; the broader M2 aggregate dropped $2.4 billion, to $3.5 trillion; and M3 declined $2.5 billion, to $4.2 trillion, in the same period.
The market gets another batch of numbers today, including the June personal income and consumption and factory orders reports, but traders said the key numbers would be the Chicago purchasing manager's index for July.
The September bond futures contract closed 9/32 lower at 104 28/32, after trading as low as 104 14/32.
In the cash market, the 30-year 8% bond was 3/32 higher, at 106 20/32-106 24/32, to yield 7.43%.
The 7 1/2% 10-year note fell 6/32, to 105 31/32-106 3/32, to yield 6.64%.
The three-year 5 7/8% note was down 1/8. at 102 28/32-102 30/32, to yield 4.73%.
In when-issued trading, the 4 1/4% two-year note was 1/32 lower, at 99 29/32-99 30/32, to yield 4.28%, and the 5 1/2% five-year note was off 9/32, at 99-99 2/32, to yield 5.71%.
Rates on Treasury bills were mixed, with the three-month bill up one basis point at 3.19%, the six-month bill steady at 3.26%, and the year bill three basis points higher at 3.45%
In other news, the New York Fed said the federal funds rate averaged 3.18% in the week ended Wednesday, down from 3.22% during the previous week.