Worries about a Clinton presidency continued to bedevil the Treasury market yesterday on the eve of the election.
By the end of the day, the 30-year bonds was off 3/8 point and yielded 7.65%, while note prices were off 1/8 to 1/2 point.
"There's a Clinton fear, that's what the market's trading off," a bond futures trader said.
Late last week, the Treasury market improved a little when polls showed Democratic candidate Bill Clinton was losing his lead over President Bush. But various polls released yesterday showed Clinton's lead widening again.
A Wall Street Journal/ABC News polls gave Clinton an eight-point lead, a CNN/USA Today poll put Clinton 12 points ahead, and a Harris poll showed Clinton with a five-point lead.
Stephen Gallagher, an economist at Kidder, Peabody & Co., pointed out that one poll yesterday showed Bush pulling ahead in Ohio.
He said the divergent polls were less important than the market's perception that Clinton has a solid lead in the electoral college vote.
Yesterday's price declines occurred in very thin activity, and traders said the lack of liquidity probably exacerbated the size of the losses.
A 10-year note trader said the market was in worse shape than it looked because the off-the run issues have been deteriorating faster than the active issues.
Usually when retail investors sell off-the-run securities to dealers, dealers hedge that inventory by establishing a short position in an active issue. But it is hard to do that right now because so many of the active issues are costly to borrow in the repurchase market. As a result, the trader noted, the spreads between active and off-the-runs have widened.
Most Treasury traders would prefer that President Bush be reelected because they are worried that Clinton will add to the budget deficit and reignite inflationary pressures in an attempt to stimulate the economy.
But many traders think that even if Clinton is elected today, the market will rally, because the sell-off in recent weeks has more than priced that news into the market. A Bush victory would result in a bigger rally, they say.
A bond salesman was not so optimistic. Even though current yield levels look high given the economy's slow rate of growth, "I think this community is concerned about bidding on supply and looking at the employment number," he said.
The October employment report will be released Friday, and next week dealers must bid on the quarterly refunding auctions of three-and 10-year notes and 30-year bonds.
The salesman added that intermediate technical indicators like the four-week and eight-week moving averages suggest the bond market will endure several more weeks of price declines.
"So I don't know about a real sustainable rally," the salesman said. "Sure, we could get a 1/2-point, a 3/4-point pop, but I think it will be met with selling."
Gallagher said he did not see anything to prevent the market from rallying for a couple of days after the election.
"Everyone's employment numbers are tame, so that doesn't seem that big an obstacle," he said. "And I think people have the refunding discounted, so that won't prevent the market from moving up."
But Gallagher said that if Clinton is elected, the market's fears will reemerge as the inauguration draws near.
The market ignored yesterday's economic indicators, both of which showed more strength than expected.
The National Association of Purchasing Management said its October survey showed economic growth picked up again last month after slowing in September. Its October index rose to 50.6%, from the 49.0% reading in September, as new orders and production rose and prices fell. Street economists expected a small decline in the index.
According to the association, any reading over 50% shows manufacturing activity is increasing, while a reading over 44.5% shows the economy as a whole is expanding.
Traders paid even less attention to the unexpectedly strong 1.3% surge in construction spending reported for September. The consensus forecast was for a 0.4% increase.
The market is also likely to ignore today's only number, the September index of leading indicators. Economists expect a 0.1% decrease, following the 0.2% decline in August.
The Treasury's refunding announcement will be of more interest. Economists expect a $37 billion or $37.5 billion package, up from the $36 billion sold at the August refunding.
Traders are also placing bets on whether the Treasury will reopen either the 10-year or 30-year.
Some traders argue that it would make sense to reopen the 10-year notes. The issue has been expensive to borrow since it was auctioned in August because dealers of corporate and mortgage-backed securities use it to hedge their inventories.
The 10-years are trading so far below the original issue discount that the Treasury would have to invoke a ruling issued by the Internal Revenue Service last fall that allows them to reopen in the case of a protracted squeeze.
But Louis Crandall, chief economist at R.H. Wrightson & Associates, argued that the Treasury has yet to use the IRS ruling and might not want to set a precedent by using it in this situation.
He noted that the current 6 3/8% 10-year note is yielding only 7 basis points more than adjoining issues, which is less price distortion than has occurred in some other recent squeezes.
"They clearly have the ability, if they want to, to declare this a case of acute and protracted squeeze and reopen the issue," Crandall said. "But do they want to establish this as a precedent to invoke a special IRS ruling? We think not."
The December bond futures contract ended 1/4 point lower at 102 16/32.
In the cash market, the 7 1/4% 30-year bond was 13/32 lower, at 95 4/32-95 8/32, to yield 7.65%.
The 6 3/8% 10-year note fell 18/32, to 96 14/32-96 18/32, to yield 6.86%.
The three-year 4 5/8% note was down 10/32, at 99 3/32-99 5/32, to yield 4.95%.
Rates on Treasury bills were higher, with the three-month bill up five basis points at 3.02%, the six-month bill up six basis points at 3.26%, and the year bill seven basis points higher at 3.46%. !!!BEGIN TABLE
Treasury Market Yields
Monday Week Month
3-Month Bill 3.06 2.96 2.67
6-Monty Bill 3.33 3.29 2.85
1-Year Bill 3.57 3.51 2.97
2-Year Note 4.46 4.32 3.67
3-Year Note 4.95 4.86 4.09
5-Year Note 5.97 5.87 5.17
7-Year Note 6.44 6.40 5.76
10-Year Note 6.86 6.82 6.22
30-Year Bond 7.65 7.65 7.34
Source: Cantor, Fitzgerald/Telerate !!!END TABLE