The long bond supplied another one for the history books yesterday as it closed the session at a new low yield.

The 30-year bond ended up 7/32, to yield 6.44%, its lowest level since the Treasury began regular bond auctions in 1977. The long bond finished Monday's session at 6.46%.

Prices in the short and intermediate sectors of the market edged slightly lower as money moved out on the yield curve.

Retail investors extending the duration of their portfolios and speculative players purchasing strips provided the long end of the market with a solid base of support yesterday.

Participants said recent reports have lent credence to the market's view that economic growth and inflationary pressures remain moderate.

Those fundamentals, along with passage of the federal budget, point toward further flattening of the yield curve and have given investors more confidence to hold long-dated paper, they said.

Since late Friday, the spread between the two-year note and the long bond has narrowed by four basis points.

"The market's tone is solid," said William Pike, trading manager at Chemical Securities. The yield curve's flattening trend continues to sap some strength out of the short end, Pike said, noting that the 30-year bond remains the issue of choice.

A major factor behind the movement of money out on the curve has been the Federal Reserve's resolve in combatting inflation. Participants said investors are gaining confidence that the Fed will take stern measures to keep inflation under wraps.

Improved prospects for low inflation and flatter yield curve have resulted in stepped-up demand for zero-coupon bonds. Also helping the long end were expectations for a scarcity of long-dated paper as the Treasury begins its semi-annual bond auction cycle tomorrow.

Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., said that lack of supply at the long end has created greater demand for bonds and will facilitate further reductions in long-term rates.

Strip buying remains a major part of the long end's impressive performance this week. Zero-coupon bonds have recently become more popular with speculative investors looking to make quick gains on small moves in the market.

The market go through the first leg of the quarterly refunding auctions without a glitch. The Treasury set a 4 3/8% coupon on $16.6 billion of three-year notes that it auctioned at a 4.49% yield, a price of 99.68. Sixty-eight percent of the bids came at the high yield and the bid cover ratio was a respectable 2.73%.

The results were in line with the market's expectations for a Street-dominated auction. Before the auction got under way, traders had predicted sparse retail interest in the three-year note as most accounts were awaiting today's 10-year note and the bond auction.

"A lot of people are focusing on the longer-dated issues," said Matthew Alexy, senior market strategist at First Boston Corp. "The 10-year and bond auctions will set the market's tone going forward."

Today, the market is faced with absorbing $11 billion in new 10-year notes. Most believe the auction will be met with decent demand because of the market's appetite for longer-dated paper.

Robert McCorkle, a trader at Seattle Northwest Securities, expects the 10-year auction to go well as more retail investors put in bids.

But ahead of the bond sale, traders said the 10-year note may suffer from investors with their minds set on 30-year paper. There is also the risk that this week's rally has brought the 10-year into unattractive territory.

"The bond is trading in a world of its own and people may stay pretty close to the vest for the 10-year," said Stephen Slifer, managing director at Lehman Brothers. "The 10-year continues to trade pretty well, but we may have a somewhat weaker market to deal with for the auction."

Dealers said that, pending good news on the inflation front this week, prospects for the bond sale are solid. They also expect the buy side of the market to be out in force to bid on the bond.

"If there ever was a time when you could build a case for lower yields and higher prices, it's now," said Hugh Johnson, chief investment officer at First Albany Corp.

The market is eagerly awaiting release of the the producer and consumer prices indexes later this week. Expectations are for minimal increases in each.

While market participants agreed that the yield on the bond could rise slightly as dealers try to cheapen the issue and make it more attractive, the long end of the curve is likely to maintain a solid bid and hold the spotlight this week.

In futures, the September contract ended up 4/32 to 116.03.

In the cash markets, the 4 1/4% two-year note was quoted late yesterday down 2/32 at 100.09-100.10 to yield 5.08%, the 5 1/4% five-year note ended down 1/32 at 100.15-100.17 to yield 5.12%, the 6 1/4% 10-year note was down 1/32 at 103.06-103.08 to yield 5.80%, and the 7 1/8 30-year bond was up 7/32 at 108.28-108.30 to yield 6.44%.

The three-month Treasury bill was down one basis point at 3.08%, the six-month bill was unchanged at at 3.25%, and the year bill was up one basis point at 3.48%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.08 3.13 3.086-Month Bill 3.25 3.30 3.221-Year Bill 3.48 3.54 3.402-Year Note 4.08 4.15 4.003-Year Note 4.36 4.44 4.305-Year Note 5.12 5.17 5.007-Year Note 5.42 5.44 5.3710-Year Note 5.80 5.80 5.7330-Year Bond 6.44 6.52 6.61 Source: Cantor, Fitzgerald/Telerate

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