Positive fundamental and technical factors continued to underpin the market yesterday and attracted a steady stream of buyers.
The 30-year bond ended up 21/32 to yield 6.29%, the lowest yield level in the 16 years that the Treasury has held regular bond auctions.
Prices rose across the yield curve on little more than an extension of the market's bullish trend, as trading activity was light and there was no fresh news to move the market, participants said.
Recent news on the economy has supported the market's view that growth remains sluggish and that price pressures are minimal.
Underlying fundamentals have led many participants to believe that monetary policy will remain unchanged and helped the market blow through the Treasury's quarterly refunding last week without a glitch.
The momentum, coupled with expectations for steady short-term interest rates, carried over into yesterday's trading session.
"The economic news in the last weeks has created a positive tone for all sectors of the market," said Matthew Alexy, senior market strategist at First Boston Corp.
Most notable, investors have rediscovered the short end. In buying short coupons, participants are placing bets that the Federal Reserve will not need to boost interest rates to combat inflation.
"The front end has been given a second change on life and is performing strongly," said Anthony Karydakis, senior financial economist at First Chicago Corp.
Expectations for steady rates come against the backdrop of this week's meeting of the Federal Open Market Committee.
In light of recent activity in the economy and improved prospects for inflation, participants are anxious to see if the central bank will assume a neutral stance on monetary policy. The market may get a few clues when Fed Chairman Alan Greenspan speaks in Jackson Hole, Wyo., later this week.
"The prevailing view is that the Fed will come out of these talks with a neutral stance on monetary policy," said one head trader at a primary dealership. "Inflation remains well-controlled and should keep the Fed from boosting short-term interest rates."
The 30-year bond continued to outperform the rest of the curve yesterday and continued tracking a course yesterday which market analysts believe will take the issue down to 6.25% in coming sessions.
Demand for the long bond continues to come from money managers looking to extend the duration of their portfolios and from speculative accounts getting in on the rally at the long end of the market.
"The landscape has changed considerably for the market," Karydakis said. The long end of the market continues to benefit from momentum generated by last week's Treasury refunding by last from scarcity value because the Treasury is now issuing bonds on a semiannual cycle, rather than quarterly, Karydakis said.
Another plus for the long end has been the success with which dealers have distributed the 10-year notes and 30-year bonds they purchased during last week's quarterly refunding.
"Most of the paper has already been redistributing and out of dealers' hands," Karydakis said. "There is no overhang from the supply."
Carry-over support from other fixed-income instruments was a boon for the intermediate sector yesterday.
Traders said that Treasury securities are being purchased as replacements for large amounts of mortgage-related and municipal bonds subject to early retirement, many of which are being redeemed or refunded prior to final maturity to take advantage of low rates.
On the economic indicator front, the Federal Reserve reported yesterday that U.S. industrial production gained 0.4% in July, resulting from a small increase in durable goods production and a large advance in utilities' output. The gain followed two straight declines, a 0.1% drop in June and a 0.2% fall in May.
Fred Liener, market strategist at Continental Bank, said this gain was in line with analysts expectations and prompted little market reaction.
Manufacturing output also declined in both May and June. Nondurable production was unchanged in July. Utility production surged 3.3% in July, following a 1.5% gain in June.
The Treasury Department's three and six month bill auctions drew strong demand yesterday at average rates of 3.03% and 3.12% respectively.
In futures trading, the September contract ended up 6/32 to 116.04.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday up 1/32 at 100.17-100.18 to yield 3.94%; the 5 1/4 five-year note ended up 4/32 at 100.29-100.31 to yield 5.02%; the 6 1/4% 10-year note was up 8/32 at 100.16-100.18 to yield 5.67%; and the 7 1/8% 30-year bond was up 21/32 at 99.09-99.11 to yield 6.29%.
The three-month Treasury bill was up one basis point at 3.07%; the six-month bill was unchanged at 3.20%; and the year bill was up two basis points at 3.39%.Treasury Market Yields Prev. Prev. Monday Week Month3-Month bill 3.07 3.06 3.086-Month Bill 3.20 3.23 3.221-Year Bill 3.39 3.45 3.382-Year Note 3.94 4.05 3.973-Year Note 4.34 4.34 4.265-Year Note 5.02 5.10 4.987-Year Note 5.29 5.41 5.3210-Year Note 5.67 5.79 5.6830-Year Bond 6.29 6.46 6.53Source: Cantor, Fitzgerald/Telerate