The Treasury 30-year bond rallied yesterday and pulled most other notes up with it as some participants decided to put on yield-curve flattening trades.
Late in the afternoon, the 30-year bond was 3/8 point higher and yielded 6.77%, while note prices were unchanged to 1/4 point higher.
Joe Plauche, a financial futures analyst at Dean Witter Reynolds Inc., said recent comments by Federal Reserve governors had convinced investors that the short end of the market will remain under pressure and the yield curve will flatten.
"For the second consecutive day, you've had Fed officials speak tough about the need to contain inflation," Plauche said. "In response to that sort of commentary, you have dealers and similar accounts putting on yield curve flattening trades by buying the long end and selling the short end."
J. Alfred Broaddus Jr., president of the Richmond Fed, said yesterday he was concerned about the big increases in price measures in the first four months of this year. On Friday, Fed governors Wayne Angell and Lawrence Lindsey both commented on the need to keep inflation under control.
Plauche said this week's slew of short-term auctions had contributed to the trend toward flattening trades, as had anticipation that the stronger dollar will encourage foreign investment at the long end.
The Treasury will auction more than $66 billion of bills and short-term notes this week. Yesterdays sale of $24 billion of three- and six-month bills will be followed by the auction of $16 billion of two-year notes today, $1 1 billion of five-year notes tomorrow, and $15.25 billion of year bills Thursday.
The long end added to its gains when the September bond futures contract broke through its previous all-time high of 112 15/32.
That break triggered some buying to cover short positions, said Scott Winningham, chief market analyst at Stone & McCarthy Research Associates in Princeton, N.J.
Traders and analysts said the gains occurred in very thin trading.
Jerry Zukowski. an economist at PaineWebber Inc., said the improvement was "more technical than fundamental in nature."
"We don't see any broadbased buying support other than those trying to put on curve trades or covering themselves after the [bond futures] contract broke through support levels," Zukowski said.
Yesterday's only economic news, the May federal budget statement, did not have much impact on bond prices.
The Treasury said the government ran a $39.96 billion deficit in May. That is an improvement from the $46.8 billion deficit last May and the $53.4 billion deficit posted in May 1991.
During the first eight months of the current fiscal year, the government accumulated a $211.7 billion deficit, which is almost $20 billion less than the $231.5 billion deficit for the first eight months of last year.
But Winningham said that improvement was an illusion: "After you account for the fact that the Resolution Trust Corp. hasn't yet been funded, we're running dead even with last year."
Some traders were surprised that the market had rallied yesterday on the eve of this week's note auctions.
The short end of the bond market has lost most of its luster in recent week. Even the May inflation reports showed that the Federal Reserve need not increase short-term rates over the near term, participants still think the Fed's next move is likely to be a tightening rather than an easing.
The front end also faces increasing supply over the summer as the Treasury issues more short-term securities and less long-term paper.
Traders said those factors may dampen interest in the auctions.
Late yesterday, the when-issued two-year notes were yielding 4.17% and the when-issued five-years stood at 5.19%.
The September bond futures contract closed 5/32 higher at 112 15/32.
In the cash market, the 7 1/8% 30-year bond was 13/32 higher, at 104 14/32-104 16/32, to yield 6.77%.
The 6 1/4% 10-year note rose 7/32, to 102 15/32-102 17/32, to yield 5.90%.
The three-year 4 1/4% note was up 2/32, at 99 12/32-99 14/32, to yield 4.45%.
Rates on Treasury bills were little changed, with the three-month bill steady at 3.06%. the six-month bill one basis point lower at 3.17%, and the year bill unchanged at 3.37%.
Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 3.10 3.10 3.096-Month Bill 3.24 3.27 3.261-Year Bill 3.48 3.48 3.472-Year Note 4.12 4.12 4.183-Year Note 4.45 4.51 4.595-Year Note 5.17 5.20 5.357-Year Note 5.54 5.58 5.7910-Year Note 5.90 5.96 6.1630-Year Bond 6.77 6.81 6.99