The market is faced with a tug of war this week between those who think long-term rates are going higher and those who believe rates have room to move lower.
The problem for investors in government securities is that people on both sides of the mud pit can make a convincing case for their opposing views on the fixed-income market.
The bulls think that the economy is growing slowly, but not fast enough to create jobs or boost inflation. They also think the Clinton administration's tax plan, coupled with weak economies abroad, will keep the overall economy growing at a snail's pace.
Those factors, the bulls think, will conspire to provide the bond market with continued support through the end of the year.
The bears, on the other hand, point to economic data released last week as evidence that the economy is not as weak as many had previously thought and that inflationary pressures have not disappeared.
Participants say this title bout will continue to play out through the end of the month as the market grapples to find a new direction.
"We'll be marked in a trading range for the next couple of weeks until we get some economic data that shows us where the market's headed next," said Joseph Liro, chief economist at S.G. Warburg & Co.
Liro cited a number of factors that brought the great Treasury market rally of 1993 to a grinding halt this week. Chief among them was a higher-than-expected reading on the consumer price index, which ignited fears of a resurgence of inflation.
The rally in Treasuries has been based on three basic premises: that the economy would remain weak in the second half of 1993; that inflation would continue to be moderate; and that the Federal Reserve would either cut or hold steady on its interest rate policy.
But economic indicators released last week called all three of these assumptions into question, participants said. Increases in the consumer price index and the retail sales report and signs of stabilization in the initial jobless claims reports and other reports have cumulatively put market participants on the defensive.
Tony Crescenzi, head of fixed-income trading at Miller, Tabak, Hirsch & Co., believes that the market's correction last week was a prelude to a much larger decline in prices. Like many on Wall Street, he is of those thinking that the market went too far, too fast and that the factors that were underpinning the Treasuries buying frenzy are now losing credibility.
Taking a more optimistic view, James Kenney, head government trader at Prudential Securities, believes Treasuries have found a new trading range around the 6% yield on the long bond. While he does not expect another attempt to push prices higher until fundamental news on the economy supports higher price levels, Kenney believes another stab at the 5.50% yield for the 30-year bond is likely in coming weeks.
"I think we'll see one more gasp get to 5.50% on the bond," Kenney said.
Friday's Market
The consolidative trend in the Treasuries continued Friday with the cash bond edging lower and the rest of the market posting modest gains on the day.
The 30-year bond ended down 5/32 Friday, to yield 6.03%.
Activity was extremely thin because many participants were out in observance of the Jewish New Year, and there was little news to inspire trading.
Prices seesawed back and forth Friday, edging lower in the first half of the session and rebounding through the afternoon as a rally in the futures market carried over into cash.
The December bond contract hit some stops, triggering orders to buy as it rose. Strong buying in futures gave the cash market a much-needed boost.
Buying in the cash market also came from funds' taking advantage of some attractive yield levels brought on by the recent sell-off. Traders said the market spent the better part of the session searching for levels at which accounts will be comfortable holding securities.
While stronger economic data released this week sent a sobering blow to the market, putting investors on the defensive and halting the rally in Treasuries, many believe that economic fundamentals continue to support the market at current levels.
The short end of the market out-performed the rest of the issues as some accounts put on yield curve-steepening trades. as many felt uncomfortable about the duration of their portfolios in a corrective market.
The only economic report released Friday was the University of Michigan's consumer sentiment survey. The closely watched index was mixed in September. posting a slight increase in consumers' assessment of present conditions and a slight decline in future expectation The release did not have a significant impact on market psychology, traders said.
The move by some small banks to cut their prime rates continued Friday as Harris Trust and Savings Bank and United Missouri Bank both reduced their lending rates 25 basis points to 53/4%.
While other small banks may reduce their prime rates to pick up increased market share, said Raymond Stone, a managing partner at Stone & McCarthy Research Associates, the trend is unlikely to prompt any large institutions to reduce theirs.
In futures, the September contract ended unchanged at 120.15.
In the cash markets, the 3 7/8% two-year note was quoted late Friday up 1/32 at 100.00-100.01 to yield 3.85%. The 4 3/4% five-year note ended unchanged at 99.30-100.02 to yield 4.73%. The 5 3/4% 10-year note was up 5/32 at 102.25-102.29 to yield 5.36%. And the 6 1/4 % 30-year bond was down 5/32 at 102.25-102.29 to yield 6.03%.Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 3.00 3.01 3.036-Month Bill 3.15 3.14 3.181 -Year Bill 3.37 3.29 3.382-Year Note 3.85 3.77 3.913-Year Note 4.15 4.06 4.285-Year Note 4.73 4.65 4.947-Year Note 4.93 4.86 5.2210-Year Note 5.36 5.27 5.6030-Year Bond 6.03 5.87 6.21Source: Cantor, Fitzgerald/Telerate
