Long-term Treasury prices closed with big losses yesterday after reports of another Washington, D.C., notion on how to stimulate the economy sent bond traders into a tizzy.
The worries about fiscal policy wiped out most of the gains the market made yesterday morning when a surge in jobless claims provided more evidence that the economy is faltering.
The 30-year bond closed 7/8 point lower to yield 7.97%, while bill and short-term note prices ended with small gains.
The sell-off got started when Market News Service said the Bush administration was considering giving consumers tax breaks for buying U.S.-made automobiles.
The White House's denial only boosted prices temporarily, and traders said the story had added to their worries about how a tax stimulus package could affect the fixed-income markets.
"Anything that has to do with taxes and the budget spooks the long end of the market," a government bond trader said. Treasury Market Yields
Thursday Week Month
3-Month Bill 4.54 4.74 5.11
6-Month Bill 4.67 4.86 5.24
1-Year Bill 4.74 4.93 5.31
2-Year Note 5.46 5.58 5.93
3-Year Note 5.81 5.91 6.19
4-Year Note 5.91 6.02 6.37
5-Year Note 6.53 6.60 6.91
7-Year Note 6.97 6.98 7.32
10-Year Note 7.39 7.33 7.63
15-Year Bond 7.75 7.63 7.83
30-Year Bond 7.96 7.81 8.02
Source: Cantor, Fitzgerald/Telerate
Frederick Leiner, a market strategist at Continental Illinois, said the story about tax breaks for buying cars sounded as if the administration was sending up a trial baloon. "The problem is it's leaving the market with the impression the fiscal policymakers in Washington don't know what they're doing.
"The other part of the problem is that many of the proposals we've heard in the last month or so are being viewed by the Treasury market as short-term in nature," Mr. Leiner added. "I think the bond market is trying to say that some sort of short-term fiscal policy is not the best way to help the economy.
"Somebody has to pay for shot-term fiscal policy and that somebody is anybody who owns any type of U.S. fixed-income security," he continued.
William Griggs, a managing director at Griggs & Santow Inc., said any type of fiscal package would hurt long-term prices, since it would increase the budget deficit, thus adding to Treasury supply, and could also send inflation higher.
Mr. Griggs said nothing will happen this year, and a program of fiscal stimulus might be avoided even next year if the economy improves.
"We're just marking time until we see how the economy is performing," he said. "But if consumer confidence doesn't get any better and growth is running around 1%, I think you'll get a package."
As the long end fell yesterday afternoon, there were reports that huge quantities of the principal portions of Treasury strips were being sold. Traders said the reports were exaggerated but some strips probably were sold.
The short term, which had a good bid all day because of the surge in jobless claims, gave a little ground as the long end fell. "Maybe that convinced some people who had money in their intermediate trades to cash out," a note trader said.
Still, the yield curve speetened drastically during the session. By late yesterday, the 30-year was yielding 250 basis points more than the two-year note, up from 241 late Wednesday.
"A lot of people are trying to call the high end of the curve and they keep getting their heads handed to them," the bond trader said.
He predicted the coupon curve would get to 260 or 270 basis points in the near future and said there was no reason to doubt a 300-basis-point curve was possible.
The market started out the day with a rally all along the curve on the news that new claims for unemployment insurance had risen 39,000 to 493,000, the highest weekly level since late April.
Claims had surged 33,000 in the week ended Nov. 2, and economists expected to see a small decline in the claims reported yesterday.
The total number of people receiving claims also jumped, to 3.43 million, an increase of 104,000.
Analysts said even though some of the rise in claims could be explained away, the second big increase in a row was troubling proof that the labor market is flagging and increases the probability that the Fed will ease again.
Sally Kleinman, a financial markets analyst at Manufacturers Hanover Securities Corp., said the seasonal factors for the week, which contained Election Day, may have had an upward bias since this year's elctions were not that important and state government operations were probably disrupted less than usual.
But Ms. Kleinman said she did not find the report's general message surprising since she believes the economy is "in pretty bad shape."
The claims number suggests November nonfarm payrolls will be weaker than expected, she said. "If there's any rise at all, it's going to be sluggish, and it's more likely going to be a decline."
Today's only indicator is the Treasury's budget statement for October, the first month of fiscal 1992. Eleven economists surveyed by The Bond Buyer on average expect a $32.0 billion deficit, up from the $26.1 billion gap in October 1991 and the $27.0 billion deficit the previous October.
The market got another blow late in the day when the money supply numbers were stronger than expected.
A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply rose $1.1 million to $884.9 billion in the week ended Nov. 11; the broader M2 aggregate gained $5.8 billion, to $3.4 trillion; and M3 increased $7.2 billion to $4.2 trillion in the same period.
The December bond future contract closed 9/16 lower at 99 14/32.
In the cash market, the 30-year 8% bond was 29/32 lower, at 100 7/32-100 11/32, to yield 7.96%.
The 7 1/2% 10-year note fell 9/32, to 100 19/32-100 23/32, to yield 7.39%.
The three-year 6% note was up 1/32, at 100 14/32-100 16/32, to yield 5.81%.
In when-issued trading, the two-year notes to be sold Monday were offered at 5.4% and the five-years to be auctioned Tuesday were bid at 6.55%.
Rates on Treasury bills were lowere, with the three-month bill down five basis points at 4.44%, the six-month bill four basis points lower at 4.51%, and the year bill off six basis points at 4.53%.
Also, for the week ending Wednesday, the federal funds rate averaged 4.89%, up from 4.74% the previous week, according to the New York Fed.