Treasury prices rallied for the second session in a row yesterday when retail investors showed up in force at the government's auction of 30-year bonds.
Late yesterday afternoon, the 30-year bond was up 3/4 point from London's closing levels Wednesday, and yielded 7.59%. The cash market in government securities was closed in the U.S. on Wednesday for Veterans Day.
Treasury prices had also rallied Tuesday on the successful 10-year note sale and the meager 0.1% rise in October producer prices.
Over the last two trading sessions, "we've dropped almost 20 basis points in yield at the long end," said William Sullivan, director of money market research at Dean Witter Reynolds Inc.
Sullivan said the catalyst for yesterday's gains was "the decent demand for this 30-year."
"The market got an added lift from Gov. Clinton's press conference, in which he didn't say anything damaging about widening the budget gap," he added.
Traders said the tight bidding at the auction was impressive and suggested there had been genuine interest from some retail investors.
They said part of the improvement in Treasury prices yesterday afternoon occurred because dealers who missed getting what they needed at the auction had to buy securities to cover their short positions in the secondary market.
The when-issued bonds were trading at 7.65% at auction time and traders expected the issue to be sold at 7.66% with some bids accepted at 7.67%.
Instead, that 7.66% yield was both the average and the highest yield at which bids were awarded, and dealers who bid for bonds at 7.66% got only 66% of what they asked for.
"At the time of the auction, it was generally perceived that it would get back to 67 and you could safely bid 66 for shorts," a note trader said. "But you only covered 2/3 of your shorts" at 7.66%.
"Some people were obviously surprised," the trader said. "The market shot up right afterwards."
By late in the afternoon, the price of the new bonds had risen enough to push the yield down to 7.57%.
A bond trader said the auction was "spectacular," but predicted the long bond would run into resistance at 7.50%. "This is an uptick that's meant to be sold at some stage," he said.
Sullivan said Treasury prices had finally gotten so cheap that retail investors decided to get involved again.
"The back-off in prices was a by-product of a change in psychology and as that change in psychology took place, cash positions were building," he said. "Most of the events of this week, whether Clinton's press conference or the PPI numbers, were supportive, and that pulled cash off the sidelines."
Jan Hurley, a senior market analyst at Chase Securities, said this week's gains showed the market was recovering after having overreacted to worries about Clinton's election and the possibility of fiscal stimulus.
The market "just got way too negative and that's why we saw some improvement this week," she said.
Traders said they were not that fond of Robert Reich, the Harvard economist whom President-elect Clinton has named as head of economic policy for his transition team. "He's for the government having an active role in the economy and the market doesn't see him having the independent mind of a Paul Volcker," the bond trader said.
But the position on the transition team is not seen as a key role and most people thought that job puts Reich out of the running for a cabinet post.
Earlier in the day, Treasury prices dipped briefly when the weekly jobless claims posted an unexpected decline.
New claims for unemployment insurance feel 5,000, to 355,000, in the week ended Oct. 31, when the consensus forecast called for a 7,000 gain in new filings. At the same time, the number of people filing for federal benefits slipped to 20,869, from 23,497 in the previous week.
Analysts said the continuing declines in new filings for unemployment insurance suggested the labor market was beginning to improve.
"For the second week here, claims have surprised everyone by being lower than what has generally been forecast," said Peter Greenbaum an economist at Smith Barney, Harris Upham & Co.
"If you look at all the programs, federal and state, the trend in claims is still down," Greenblaum said. "The four-week moving average of the combined programs is down 5 weeks in a row, which is usually considered a necessary condition before you can see a sustained rise in job creation."
Because of Wednesday's holiday, the Federal Reserve postponed its release of the money supply statistics, which are usually reported on Thursdays, until today.
The December bond futures contract closed 3/4 higher at 103 15/32.
In the cash market, the 7 1/4% 30-year bond was 23/32 higher, at 95 27/32-95 31/32, to yield 7.59%.
In when-issued trading, the 6 3/8% 10-year note rose 17/32, to 97 2/32-97 6/32, to yield 6.77%.
The when-issued three-year 5 1/8% note was up 5/32, at 100 9/32-100 11/32, to yield 5%.
Rates on Treasury bills were little changed, with the three-month bill steady at 3.07%, the six-month bill unchanged at 3.28%, and the year bill one basis point lower at 3.43%.