An unexpectedly popular 30-year auction brightened the Treasury market's gloomy mood yesterday.
After rallying sharply after the auction results were reported, long-term prices inched a little higher late in the day on the news M2 had fallen sharply.
At yesterday's close, the current 8 1/8% 30-year was up almost a point and yielded 7.91%.
Short-term notes barely reacted to the successful bond auction, and the stronger performance by long-term securities caused an abrupt flattening in the yield curve.
The 30-year auction is usually the hardest to place of the three refunding auctions, and after the dismal three-year and 10-year auctions earlier in the week, traders were wary as the bidding deadline approached yesterday.
When bids went in, the 30-year was trading as 7.99% and participants guessed the auction would come at an 8.01% average.
Instead, the $12 billion of bonds came at an 8% average. And traders who thought they would have bids accepted at 8.02% or 8.03% found the highest bid accepted at the auction was 8.01%.
As the market waited for the results, talk of retail interest helped the when-issued bond improve to 7.97%. Once the auction results came out, the new bond shot higher.
By late yesterday, the new 30-year, which bears an 8% coupon, was yielding 7.90%, quite an improvement from the 8% average at the auction.
Analysts said the auction statistics showed other signs of strength.
Bids totaled $30.8 billion, 2.56 times the size of the issue; usually bids at bond auctions are only about double the size of the issue.
There were also an amazing $937 million of noncompetitive bids, far above the average of $355 million over the last few years.
Some of the increase may be due to the new Treasury regulations increasing the limit on such bids to $5 million from $1 million.
But at the three-year and 10-year note sales, when the new limit was also in effect, noncompetitive bids were not spectacular.
"We saw an extraordinarily high volume of noncomps, and that means that a significant share of the 30-year has gravitated to very strong hands," said William Sullivan, director of money market research at Dean Witter Reynolds Inc.
Mr. Sullivan described the auction results as "handsome" and said the demand for the 30-year suggests retail accounts held off buying at the note auctions because they wanted to get the higher yield offered by the 30-year, and not because they were upset about the Treasury's rule changes.
"Investors were selective and wanted to lock in the maximum return possible," he said.
Douglas Schindwolf, an economist at Smith Barney, Harris Upham & Co., said 8% is an important psychological level on the bond.
The 30-year issue "had backed up to a level where people thought it was worth stepping back into the market for," he said.
The bond market ignored most of yesterday's economic indicators.
Early in the day, the Labor Department said new claims for unemployment insurance rose 14,000 to 420,000 in the week ended Oct. 26. Street economists had been looking for a 24,000 gain.
Treasury Market Yields
Thursday Week Month
3-Month Bill 4.74 4.96 5.14
6-Month Bill 4.86 5.03 5.25
1-Year Bill 4.92 5.07 5.36
2-Year Note 5.59 5.68 5.95
3-Year Note 5.95 5.97 6.22
4-Year Note 6.03 6.11 6.41
5-Year Note 6.62 6.74 6.90
7-Year Note 7.06 7.13 7.28
10-Year Note 7.40 7.45 7.55
15-Year Bond 7.73 7.76 7.82
30-Year Bond 7.91 7.90 7.95
Source: Cantor, Fitzgerald/Telerate
stronger October chain store sales, a 0.8% increase in September wholesale sales, and a $1.55 billion decline in September consumer installment credit.
But the market did react late in the afternoon when the New York Fed reported the M2 measure of the money supply fell $6.6 billion, to $3.4 billion, in the week ended Oct. 28, reversing most of the $8.8 billion increase the previous week.
The New York Fed also reported that the nation's M1 money supply increased $1 billion to $883.8 billion in that week, while M3 decreased $3.7 billion, to $4.1 trillion.
The December bond future contract closed a full point higher, at 99 28/32.
In the cast market, the 30-year 8 1/8% bond was 31/32 higher, at 102 8/32-102 12/32, to yield 7.91%.
In when-issued trading, the 7 1/2% 10-year note rose 21/32, to 100 17/32-100 21/32, to yield 5.95%.
Rates on Treasury bills were mixed, with the three-month bill up one basis point at 4.63%, the six-month bill steady at 4.69%, and the year bill one basis point lower at 4.70%.
Also, for the week ending Wednesday, the federal funds rate averaged 5.05%, down from 5.10% previous week, according to the New York Fed.