The Treasury market's upward momentum continued yesterday and yields reached their lowest levels of the year on the eve of the government's quarterly refunding auctions.
Late yesterday, the 30-year bond was up 3/8 point to yield 7.36%. That is the lowest closing yield this year, a and takes the long bond to a level not seen since the middle of January 1987.
Even though prices are at lofty levels, participants said the market's bullish tone suggests three will be plenty of buyers for this week's $36 billion of new notes and bonds.
"It looks as if the auctions should go swimmingly well," said Maureen O'Toole, director of research at Rodman & Renshaw in Chicago.
After suffering a setback when the five-year issue auctioned in late July proved unpopular, the Treasury market rallied Friday when the July jobs statistics showed the economy was still growing slowly.
Analysts said the lackluster recovery and well-behaved inflation rates mean there is room for further price gains, especially at the long end. In fact, yesterday some traders were speculating about the possibility the long bond could fall below 7%.
That kind of speculation has helped fuel retail purchases. Most of yesterday's gains occurred overnight as foreign investors imitated the buying seen on the United States on Friday.
Treasury prices got a little extra boost from another big slide in Japanese stock prices, although New York traders complained that the meltdown in the Nikkei was getting to be an old story.
The Nikkei index of Japanese stock prices fell 2.9% or 451.93 points, to 15,066.34. In the wake of that decline, European stock markets also came under pressure, but the Dow Jones industrial average closed with a small gain yesterday.
After the initial gains, Treasury trading was slow yesterday.
A government bond trader said that a couple of efforts to knock the market back failed because buyers emerged any time prices dipped.
"The big question is whether there will be demand after they own the auctions," he continued. "The five-year traded great until you bought it, then the next 48 hours were pretty gruesome."
The refunding auctions begin with today's sale of $15 billion of three-year notes notes, followed by $11 billion of 10-year notes tomorrow and $10 billion of 30-year bonds Thursday .
Ms. O'Toole said none of this week's U. S. economic news was likely to disturb the bond market. Economists expect modest gains in tomorrow's July producer price index and Thursday's July consumer price report. which they say they will reinforce the view that inflation is under control, and Thursday's July retail sales report is expected to show consumer spending remains soft.
On the international front, the turmoil in worldwide equity markets and the fighting in Eastern Europe will offset the impact of the more attractive yields available on foreign bonds. Ms. O'Toole said. "People who might have gone overseas with their money will keep it home," she said.
Traders said today's sale, the three-year, should be the most popular of the three auctions.
A note trader predicted a successful three-year sale because the issue "is cheap and there are some outright buyers." He expects prices to decline a little this morning as dealers prepare to bid on the notes, but said the issue should be sold right where it is trading at auction time.
Ms. O'Toole said the real hurdle for the bond market might come next week as dealers with big inventories of notes and bonds focus on the Republican convention.
She said the market has built a Republican victory into prices and "it's real important that [President] Bush come out looking like he has the ability to beat Clinton."
The September bond futures contract closed 13/32 higher at 106 9/32.
In the cash market, the 30-year 8% bond was 13/32 higher, at 107 16/32-107 20/32, to yield 7.36%.
The 7 1/2% 10-year note rose 3/8, to 107 2/32-107 6/32, to yield 6.49%.
The three-year 5 7/8% note was up 3/32, at 103 12/32-103 14/32, to yield 4.53%.
In when-issued trading, the three-year note was quoted at 4.66%, the 10-year note was yielding 6.48%, and the 30-year bond was bid at 7.32%.
Rates on Treasury bills were mixed, with the three-month bill two basis points lower at 3.13%, the six-month bill steady at 3.19%, and the year bill unchanged at 3.29%.
Treasury Market Yields
Monday Prev. Prev.
3-Month Bill 3.17 3.22 3.27
6-Month Bill 3.26 3.34 3.34
1-Year Bill 3.39 3.59 3.58
2-Year Note 4.09 4.38 4.34
3-Year Note 4.53 4.83 4.87
5-Year Note 5.48 5.81 5.93
7-Year Note 5.98 6.26 6.46
10-Year Note 6.49 6.70 6.96
15-Year Bond 6.87 7.05 7.32
30-Year Bond 7.36 7.44 7.67