Treasury prices endured another volatile session Friday as the market's worries about a Clinton presidency intensified.
By late in the afternoon, the 30-year bond was off 1/4 point and yielded 7.52%, while note prices were mixed.
Long-term prices suffered a fast sell-off Friday morning when a Los Angeles Times story on Democratic presidential candidate Bill Clinton's fiscal plans revived fears of Democrat big spenders.
According to the Times article, if Clinton were elected and found the economy still stagnant in January, his advisers would consider jump-starting the economy by speeding up infrastructure spending or expanding a proposed tax credit for business investment spending. At that point, the Clinton administration would also postpone dealing with the budget deficit until the economy was back on the track.
Joel Naroff, chief economist at First Fidelity Bancorp. in Philadelphia, said such talk of fiscal stimulus was to be expected, given the continued sluggish growth and the fact that many analysts are revising down their forecasts for fourth-quarter output.
"If you get [growth] below 1% in the fourth quarter, what would you expect anybody to do, whether it's Bush, Perot or Clinton?" Naroff said.
He added that there are also limits on how quickly the government can spend money on infrastructure.
Still, the bond market's traditional concerns about the federal deficit and inflationary pressures mean it is uncomfortable with the discussion, Naroff said.
"Clinton is an unknown and the markets are concerned about the unknown," he said. "As much as he's prevented himself as a fiscally conservative Democrat, an element of skepticism is valid."
The bond market bounced off its lows by mid-morning Friday, aided by the news that the University of Michigan's preliminary report on October sentiment had fallen to 73.2 from the 75.6 September reading.
"Michigan helped get people back in," a note trader said. "That was bullish."
But the trader said the market's focus was less on economic news and more on the Clinton story and market technicals, and he said a lot of the downturn occurred because participants were eager to dump unprofitable long positions.
The market ignored additional evidence of economic weakness provided by Friday's August merchandise trade and September industrial production reports.
The trade deficit grew to $9 billion in August, from a revised $7.28 billion July gap. The deterioration was far worse than economists expected and a 6.1% drop in exports was to blame.
The decline in exports theoretically was favorable for fixed-income securities, since a diminution in foreign demand should hurt U.S. production.
Nor was the bond market impressed with the news that September industrial production fell, since the 0.2% decline was less than the 0.4% decrease economists had forecast.
But Carol Stone, senior economist at Nomura Securities, said last month's industrial output was weaker than it looked on the surface, since a jump in utility output had offset a 0.4% drop in manufacturing production.
"We're still left in this stagnant, substandard path," Stone said, adding that the key numbers last week were those suggesting the economy was in equally bad shape in early October, like the University of Michigan's survey, the Philadelphia Fed's business survey, and early-October car sales.
Traders pointed out that despite the constant prices swings during recent days, the market has been stuck in a trading range.
Joel Kazis, head of Treasury trading at UBS Securities, said short-term prices would probably remain around current levels, but that long-term prices had a "bias to the downside."
"The uncertainty of what comes after the election is enough to keep the bid at the long end pretty thin," he said.
The only important indicator this week is tomorrow's September housing starts and Dana Johnson, head of market analysis at the First National Bank of Chicago, said the lack of data may mean a "heavy" bond market.
"The one thing that's kept a bid in the market has been the economic news, which has continually been on the weak side," Johnson said. "On the negative side, we'll have some supply, and I think people will continue to focus on the implications of a likely Clinton victory."
On Wednesday, the Treasury will announce the size of next week's two- and five-year note auctions.
The December bond futures contract closed 3/8 lower, at 103 22/32.
In the cash market, the 7 1/4% 30-year bond was 7/32 lower, at 96 19/32-96 23/32, to yield 7.52%.
The 6 3/8% 10-year note fell 3/8, to 98 14/32-98 18/32, to yield 6.57%.
The three-year 4 5/8% note was down 1/32, at 100 9/32-100 11/32, to yield 4.49%.
Rates on Treasury bills were mixed, with the three-month bill off one basis point, at 2.91%, the six-month bill unchanged, at 3.04%, and the year bill seven basis points higher, at 3.19%.
Traders Leave Sanwa
Bill Kenney, formerly in charge of the Treasury odd lots division at Sanwa-BGK Securities, has led a group of odd-lots traders and salesmen to stockbroker Spear Leeds & Kellogg, according to market sources.
Sanwa-BGK is a primary dealer in Treasury securities.
Carole Corcoran, Sanwa's general counsel, confirmed that some employees had left, but said Sanwa did not expect the departures to "negatively impact" the firm.
Kenney, reached by phone at Spear Leeds, declined to comment, and Tony Kerbs, a managing director at the firm, said Spear Leeds had a long-standing policy of not speaking to the press.
Treasury traders speculated that Spear Leeds hired the group to provide odd lots trading in U.S. Treasuries as a service to their equity customers.
Treasury Market Yields
Friday Week Month
3-Month Bill 2.95 2.86 2.92
6-Month Bill 3.10 3.03 2.97
1-Year Bill 3.29 3.15 3.10
2-Year Note 3.99 3.96 3.79
3-Year Note 4.49 4.43 4.32
5-Year Note 5.52 5.49 5.38
7-Year Note 6.09 6.08 5.91
10-Year Note 6.57 6.50 6.39
30-Year Bond 7.52 7.51 7.31
Source: Cantor, Fitzgerald/Telerate