Worries about today's indicators caused a wave of retail selling yesterday that sent the yield on the 30-year Treasury bond above 8 1/2% for the first time this year.
Late yesterday, the long bond was off 5/8 on the day to yield 8.54%, the highest closing yield since the middle of November.
"Guys are afraid and trying to get out of stuff," a government note trader said.
Sellers included Japanese institutional accounts liquidating less actively traded bonds, portfolio managers hedging their holdings, and locals in the bond futures pit, another note trader said.
And since "the Street's not willing to hold new supply that comes in," dealers turned right around to sell any securities they bought from retail, the trader added.
The numbers that caused such fear and loathing were this morning's May retail sales and producer price figures, as well as the weekly jobless claims data.
Economists surveyed by The Bond Buyer on an average expect a ).3% gain in both the producer price index and in prices excluding food and energy costs. But traders said there was talk yesterday that higher tobacco prices would cause the core rate of May producer prices to rise 0.4%.
And the late-May jump in auto sales is expected to show up in last month's retail sales. The consensus forecast is for a 0.6% rise in sales, but some economists are calling for gains of 1% or more.
Even though both those numbers can be explained away as one-time events, such indicators would do "nothing to dispel the market's fear of an economic recovery and disappointment over the lack of progress on inflation over the course of the recession," a bond futures trader said.
A coupon trader said another negative factor was the load of Treasury securities that will hit the market beginning with the two-year and five-year auctions in two weeks.
Given the pickup in the economy and the lack of improvement on inflation, "it's very unlikely we can take supply at these levels," the trader said.
He estimated the long bond would back up to between 8 5/8% and 8 3/4% by the time the five-year is auctioned on June 26. He also said there is a "strong possibility" the 30-year could hit 9% by the time of the August refunding.
The market was also hurt yesterday morning by a report by Washington consultants Johnson Smick Medley International that some Fed officials thought the recovery could be much stronger than expected.
According to the report, a "well-known individual" at the Fed thought the economy could "pop up and amaze everyone" over the next three quarters.
The Johnson Smick report said "internal data" had convinced Fed officials that a considerable
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.71 5.77 5.58
6-Month Bill 6.05 5.96 5.82
1-Year Bill 6.39 6.25 6.08
2-Year Note 7.04 6.80 6.80
3-Year Note 7.43 7.22 7.10
4-Year Note 7.63 7.44 7.34
5-Year Note 7.99 7.83 7.74
7-Year Note 8.21 8.04 7.98
10-Year Note 8.34 8.17 8.12
20-Year Bond 8.54 8.38 8.34
30-Year Bond 8.54 8.38 8.33
Source: Cantor, Fitzgerald/Telerate
amount of inventory liquidation had occurred, clearing the way for inventory "reinvestment" that could fuel a stronger-than-expected recovery.
The Johnson Smick report echoed some of Federal Reserve Chairman Alan Greenspan's comments last week in Japan.
But apparently the belief in a stronger-than-expected recovery is not yet universal at the Fed. Testifying before the Senate Banking Committee yesterday, Fed Governor W. Edward Kelley said the economy seemed to be improving, but growth may be flat for some time.
Traders said the Johnson Smick Medley report was old news, but that it did give retail investors another reason to sell securities yesterday.
While the rest of the market suffered, short-term bills moved a little higher yesterday thanks to the sell-off in stocks. The Dow Jones industrial average closed 23.93 points lower, at 2,951.98, after having been off close to 50 points earlier in the session.
"The short stuff traded off the stock market," a bill trader said. "There has been some defensive money going into bills."
Traders said yesterday's sell-off may have already accounted for any bad news the market gets today.
Mark Green, an economist at Wells Fargo Bank, said the market may not even respond to pleasant surprises.
"The bond market is assuming the worst, so we may not get much of a response even if the numbers aren't as bad as expected," Mr. Green said.
This week's data "will only confirm what the market already believes, that the recession is over, or nearly over," he said. "They're looking for direction, but they're not likely to get it until the next employment report" in early July.
The September bond further contract closed 23/32 lower, at 92 9/32.
In the cash market, the 30-year 8 1/8% bond was 11/16 lower, at 95 13/32-95 17/32, to yield 8.54%.
The 8% 10-year note fell 7/16, to 97 19/32-95 23/32, to yield 8.34%.
The three-year 7% note was down 1/8, at 98 26/32-98 28/32, to yield 7.43%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point, at 5.56%; the six-month bill one basis point higher, at 5.80%; and the year bill three basis points higher, at 6.03%.
In other news, Fed Governor John LaWare told a Senate Banking subcommittee yesterday he did not see a need for new legislation to deal with situations like the short squeeze earlier this month in the two-year note.
According to wire service reports, Mr. LaWare said the subject might warrant further study. But he said the government should be wary of interfering "with strong bidding for securities that lowers the cost to the taxpayer of servicing the public debt."