The yield on the long bond dropped to a six-year low yesterday, fueled by follow-through activity from last week and a burst of short covering at the end of the day.
The 30-year bond finished the session up 3/4 point and yielding 7.21%. That was the lowest yield since July 1986, when the long bond hit 7.12%, according to Chris Rupkey, a financial economist at Mitsubishi Bank.
The first session following the long holiday weekend began with 1/2 point gains at the long end, on strong interest in overseas sessions.
The increase held steady throughout the day, until just before the futures market closed. Then, according to market participants, short coverers weighed in heavily.
Despite the continuing gains for Treasuries, activity has been slow. Analysts say the rest of the week is likely to be quiet as well, given the dearth of economic indicators and the light auction calendar. The only supply for the week was yesterday's $22.05 billion in three-month and six-month bills.
The three-months were sold at an average rate of 2.91%, down from 3.17% in the previous auction on Aug. 31. It was the lowest rate since the average of 2.90% at the auction on May 13, 1963.
The six-month bills brought a 2.95% rate, down from 3.26%. That was the lowest rate since the average of 2.93% set at the auction on March 11, 1963.
Despite the continuing downward march of interest rates, analysts say further rate cuts are likely if economic indicators over the next several weeks show more deterioration.
The current rally was sparked Friday, when the Labor Department reported a decline of 83,000 jobs in August, instead of the 175,000 increase analysts had predicted.
Market participants say the most likely next step for the Fed would be a 50 basis point drop in the discount rate, which now stands level with the new Fed funds rate at 3%, set Friday.
Lower rates here will mean increased attention for the dollar, which yesterday was once again trading below 1.4 German marks. In late trading, the dollar stood at 1.3933 against the mark. Against the Japanese yen, the dollar was quoted at 122.83.
Market participants said the focus on the dollar that dominated trading last week has subsided for now.
"But we're still keeping a wary eye on the dollar," said Steven Wood, director of financial markets research at Bank of America.
Mr. Rupkey said investors are reassessing their outlook on the economy, given the lack of any signs that the recession is truly over.
"No one knows how low rates are going to go, as more and more economists talk about a significant recession and how the old measures are not going to work to get us out of this," he said. "There's even comparisons to a depression."
Mr. Rupkey added that further gains for the market might come at the end of the week, when new data on inflation become available. The producer price index for August will be released Friday, and is the only significant indicator on tap for the week.
Yesterday's release of consumer credit data for July elicited little reaction.
The Federal Reserve reported late in the day that consumer installment credit fell $1.122 billion, or 1.9%, in July. The drop followed a revised $278 million drop in June and an $893 million fall in May.
The July decline was mostly the result of a $1.5 billion drop in the report's "other" category, which includes such subcategories as mobile home credit. That category rose 6.4% in June.
Automobile credit increased $521 million following a 12% drop in June, and revolving credit fell $143 million, or 0.7%, in July.
Total outstanding credit in July totaled $721.5 billion, compared to a revised $722.7 billion the month before.
The December bond futures contract closed 31/32 point higher, at 106 29/32.
In the cash market, the 7 1/4% 30-year bond was 26/32 higher, at 100 10/32- 100 14/32, to yield 7.21%.
The 6 3/8% 10-year note rose 25/32, to 100 18/32- 100 22/32, to yield 6.28%.
The three-year 4 5/8% note was up 6/32, at 100 30/32-101, to yield 4.25%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 2.91%, the six-month bill off three basis points at 2.94%, and the year bill five basis points lower at 3.02%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 2.95 3.19 3.17
6-Month Bill 3.00 3.29 2.38
1-Year Bill 3.11 3.40 3.39
2-Year Note 3.78 4.08 4.09
3-Year Note 4.25 4.55 4.53
5-Year Note 5.18 5.48 5.46
7- Year Note 5.74 6.01 5.94
10-Year Note 6.28 6.51 6.45
30-Year Bond 7.21 7.36 7.31