The Treasury market jumped ahead almost 1 1/8 points yesterday on the force of sheer buying power from most sectors of the market.
Traders reported such strong demand that dealers were "lifted out of their positions," or actually caught with fewer bonds to sell than clamored for by buyers. The bellwether 30-year bond closed the day 1 5/32 higher, to yield 8.05%, the lowest yield since the 8.04% of Feb. 25.
The activity was not restricted to the long end of the market -- as was largely the case Tuesday -- with strong gains registered all along the yield curve. Surprisingly, market participants said the muscle-flexing had nothing to do with the series of economic data released
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.44 5.53 5.75
6-Month Bill 5.56 5.67 6.01
1-Year Bill 5.65 5.83 6.30
2-Year Note 6.33 6.53 6.89
3-Year Note 6.72 6.89 7.30
4-Year Note 6.86 7.00 7.47
5-Year Note 7.34 7.50 7.92
7-Year Note 7.64 7.78 8.16
10-Year Note 7.80 7.85 8.29
20-Year Bond 8.09 8.15 8.49
30-Year Bond 8.05 8.17 8.49
Source: Cantor, Fitzgerald/Telerate
"These are real buyers," said one trader. "They're buying and they're extending.
Other participants were pleasantly shocked by the volume of cash pouring into the government market. "There's no let up whatsoever," said a trader with a regional dealer. "We keep breaking technical levels; it;s hard to believe."
In the futures market, a busy day saw the September bond future contract close 1 point higher, at 97 24/32. Reports from the Chicago Mercantile Exchange Treasury pits said the alarming short squeeze on Tuesday was not repeated, as all such positions already were forced out.
One domestic party was caught going the wrong way Tuesday with enormous short positions that were crushed him and ruined his life, and that was it. They moved on," said one dealer with traders in the pit.
Other firms with traders in the pit confirmed the situation, but declined to identify the firm.
Yesterday, after both the consumer price index data for July and the business inventory numbers for June were released, the market remained unimpressed, holding onto price gains notched overnight. The real acceleration did not begin until about 11:20 a.m. Eastern daylight time, well after the 10:00 a.m. release of the business inventory data.
The consumer price index data for July came in exactly where market forecasters expected, at 0.2% higher, with a 0.4% increase excluding food and energy factors. The confirmation of a very low inflation climate gratified economists, but did little for traders, who said the data were old before being received.
David Blitzer, chief economist at Standard & Poor's Corp., said July's consumer price index matches the roughly 3% inflation rate he expects for the rest of the year and quashes hopes for another Federal Reserve easing this month. He looks to the August employment data, to be released in early September, for the next policy manifestation.
"There's no serious inflation problem out there," Mr. Blitzer said. "Low inflation is a necessary but not a sufficient condition to do something" in terms of monetary policy.
"They won't do anything next week," he continued. "Mr. [Alan] Greenspan [Federal Reserve Board chairman] seems to be enamored of doing something on [the employment data]. Almost every move, whether discount or Fed funds, has been tied to the employment release."
Business inventories showed a reduction of 0.3% in June, the fifth consecutive month of shrinking inventories at U.S. businesses, according to the Commerce Department. The Treasury market deemed the data a nonevent, but economists sent "conflicting" signals to the Treasury market, which resulted in an opaque soup at this turning point in the recession, according to economists. The 2.3% decline in automobile inventories, although expected by economists, grabbed the attention of retail buyers.
Carol Stone, senior economist at Nomura Securities, said the inventory data solidified predictions of a tepid rebound. "I think we agree that the recession is probably over, but certainly there's not a whole lot of exciting growth news here," Ms. Stone said.
She said the sales improvement in May received no follow-through in June, and shipments in June likewise were stagnant. "The inventory data clearly show that businesses have been successful" bringing stocks down, "but it also shows that they are not doing anything to rebuild inventories, that they weren't convinced that growth was enough to make them commit."
Bob Dieli, business economist at Northern Trust, said the "conflicting" inventory numbers left many questions about whether resulting inventory levels were voluntary.
"We probably have some involuntary inventory accumulation for people whose sales are still sluggish," Mr. Dieli said. "It usually doesn't matter, but the difference now is that it's the turning point in the recession.
"We want accumulation to be voluntary," he continued. "The fact that we get spotty reports from retailers -- that some are doing well and some are doing terribly -- is not convincing" for an economic rebound.
"If we don't get a move to inventory accumulation in the next few months," Mr. Dieli said, "then forget it. It's like trying to gain weight with an empty refrigerator. You can do it, but you have to go to the store all the time."
In other when-issued trading, the 7 7/8% 10-year note rose 5/8, to 100 11/32-100 15/32, to yield 7.80%, and the three-year 6 7/8 note was 1/4 point higher at 100 11/32-100 13/32, to yield 6.72%.
Rates on Treasury bills were mixed, with the three-month bill unchanged at 5.44%, the six-month bill of five basis points at 5.39%, and the year bill off 10 basis points at at 5.65%.