Money continued to funnel into the long end of the Treasury market yesterday, pushing the long bond to a new record-low yield for the seventh trading session in a row.
The 30-year bond closed up 3/8 of a point, to yield 5.86%, the lowest level in 25 years.
The long bond outperformed other issues in the Treasury market again yesterday, supported by yield curve-flattening trades and comments by Federal Reserve officials indicating that the central bank is not leaning toward an easing of monetary policy, despite last week's unexpectedly weak August employment report.
The movement of money into the long end came at the expense of the short end, which lagged as market participants thought longer-dated paper offered greater potential for capital appreciation and declines in yield.
Comments by David Mullins, vice chairman of the Fed, gave investors further impetus to get out of short-dated paper.
The Reuters news wire reported Mullins as saying that a cut in interest rates would not stimulate the economy enough to risk the possible side effect of higher inflation. Mullins' comments, coupled with a written statement Tuesday by Fed Chairman Alan Greenspan that suggested monetary policy will hold steady, hurt the short end of the curve.
"It's clear from the comments by Greenspan and Mullins that short-term rates are not moving lower, and that has made the short end less attractive," said Kevin Flanagan, money market economist at Dean Witter Reynolds Inc. "The short end can only go so far given a 3% funds rate."
The potential for capital appreciation is clearly greatest from the 10-year note out to the bond. The sector is attracting capital flows from retail accounts, central banks, state and local governments, and mortgage market participants.
Behind much of the move into Treasuries is the fear that there will not be enough paper to go around, traders said. They noted that the last round of auctions were held three weeks ago, and the next sale of Treasuries is not scheduled for another two weeks.
Meanwhile, the short end of the curve is faced with a steady flow of supply through the end of the year. Traders believe that scarcity value for the bond will increase as more and more fund managers and foreign central banks extend the duration of their portfolios.
While there are some in the market who think that Treasuries have reached the high end of their range, others believe the long end of the market has further upside potential because many large funds have not yet moved out on the curve.
"A number of large insurance companies are only now beginning to buy the bond, and there is still demand for the long end," said Tony Crescenzi, head of fixed-income trading at Miller, Tabak, Hirsch & Co. "Most people in the market expect that the curve will continue to flatten."
Curve-flattening trades have pushed the spread between the two-year note and 30-year bond down 15 basis points since Tuesday and more than 67 basis points since the end of July.
News on the economy continues to support the market. The Fed's "beige book" report of economic activity shows that economic growth in most regions of the country continued at a "slow to moderate" pace through early August.
Traders said the release was consistent with the findings of last Friday's employment report and shows that the economy remains weak with few inflationary pressures. Against that backdrop, observers are forecasting lower yields for the market.
"All indications point toward a strong bond market and lower long-term yield levels," one short end trader said. "There are very few negatives."
The U.S. monetary authorities purchased $1.07 billion through the sale of yen three times in the three-month period from May to July, the Federal Reserve Bank of New York reported yesterday.
The intervention in the foreign exchange markets by the U.S. Treasury and the Fed took place on May 27, May 28, and June 8, according to the central bank's report to Congress on currency activity.
At a press conference yesterday, Fed officials reported that U.S. authorities intervened as the dollar moved lower "in order to show they were willing to cooperate with other monetary authorities as appropriate and were not favoring a weak dollar as a matter of policy. "
Margaret L. Greene, senior vice president of the New York Fed and deputy manager of the Fed's open market account for foreign operations, said that during the three-month period the dollar declined 5.8% against the yen.
Against most other major currencies, however, the dollar more than reversed the decline it suffered earlier in the year. The dollar rose 9.9% against the German mark and increased 6.6% on a trade-weighted basis in terms of the other Group of 10 currencies.
Shortly after the intervention in June, the dollar strengthened temporarily, but in early July, the dollar again started to ease against the Japanese currency, closing the period at 104.23 yen per dollar, an historic low for the dollar at that time, the report says.
Greene dispelled widespread speculation that U.S. monetary authorities were seeking a lower dollar against the yen to counter Japan's trade deficit. "U.S. monetary authorities wished to relay that this was not true. The U.S. government was not looking for a weaker dollar," she said.
In futures, the September contract ended down 5/32 to 121.27.
In the cash markets, the two-year note was quoted late yesterday down 2/32 at 100.06-100.07 to yield 3.75%. The 4 3/4% five-year note ended unchanged at 100.17-100.19 to yield 4.61%. The 5 3/4% 10-year note was up 12/32 at 103.31-104.01 to yield 5.22%. And the 6 1/4% 30-year bond was up 12/32 at 105.11-105.13 to yield 5.86%.
The three-month Treasury bill was up one basis point at 2.96%; the six-month bill was up three basis points at 3.06%: and the year bill was up two basis points at 3.18%.Treasury Market Yields Prev. Prev. Wednesday Week Month 3-Month Bill 3.00 3.05 3.076-Month Bill 3.13 3.18 3.231-Year Bill 3.28 3.34 3.472-Year Note 3.75 3.85 4.063-Year Note 4.04 4.17 4.455-Year Note 4.61 4.80 5.127-Year Note 4.82 5.03 5.3910-Year Not 5.22 5.44 5.7630-Year Bond 5.86 6.08 6.42 Source: Cantor, Fitzgerald/Telerate