Treasury note and bond prices closed 1/4 to 5/8 point higher yesterday, and traders described the gains as a reaction to the big losses the market suffered late last week.
Late yesterday, the 30-year bond was up 3/8 point to yield 7.4%, while short-term and intermediate notes were up 1/4 to 5/8 point.
Traders said the market benefited from retail bargain-hunting and money coming in from other fixed-income markets.
Frederick Leiner, a market strategist at Continental Illinois National Bank & Trust Co., said the bond market got some additional assistance late in the day from the weekly Johnson Redbook report on department store sales.
The report, which showed a 2.6% gain in June sales, also indicated that "sales weakened during the last full week of July," Mr. Leiner said. "I think that gave us a little bit of a boost."
Mr. Leiner said he was impressed by the performance put in by notes maturing in two to 10 years.
"But that's the portion of the curve that performed worst last week" as the market sold off, he said. "It suggests that this was a reaction to the weakness in that sector of the curve as much as it was to anything else."
A Treasury note trader agreed: "I think we were just oversold."
Another note trader said yesterday's gains were a continuation of Monday's bounce off the lows. The market "put in a technical reversal" on Monday, and "we're having good follow-through now," he said.
The trader said the five-year notes, whose disastrous auction set off the selling last week, led the market higher yesterday. Late in the day, the 5 1/2% five-year notes were 1/2 point higher and yielded 5.69%.
"The five-year has now cleaned up and is priced more fairly to the rest of the market," the trader added. "You've redistributed the five-years from weak hands to strong hands."
In addition to the retail buying, traders said the Treasury market benefited from money coming in from the mortgage-backed market, as well as purchases of Treasuries to defease municipal bonds.
As short-term gains outpaced the improvement at the long end, the yield curve steepened. Late yesterday, the 30-year bond was yielding 314 basis points more than the two-year note, up from 306 late Monday.
At noon EDT today, the Federal Reserve will release its beige book, which compiles reports on economic conditions from the district Fed banks around the nation.
But the more important news will come later in the afternoon, when the Treasury announces the size of next week's three-year and 10-year note and 30-year bond auctions.
Most economists expect a $36 billion package, identical to the one sold in May, but there is a lot of talk in the market about the possibility of a smaller bond issue. Traders said yesterday that if the Treasury leaves the bond auction unchanged at $10 billion, long-term prices could move a bit lower.
Analysts said that except for the Johnson Redbook, yesterday's indicators had little impact on prices.
The Commerce Department said the index of leading indicators declined 0.2% in June, following the 0.6 increase in May. The June decline was the first decrease in the series since last December, but was in line with market expectations.
Auto manufacturers' reports of their late-July sales were also in line with the consensus forecast of a 6.7 million annual pace, up from the 6.3 million sales rate in the middle of the month.
Mr. Leiner said there was a lot of talk yesterday about what impact a federal program to provide jobs for teenagers would have on Friday's July employment report, and how General Motors' company-wide shutdown in July would affect tomorrow's weekly jobless claims.
Economists surveyed by The Bond Buyer on average expect a 115,000 increase in July nonfarm payrolls. Many economists also expect the June payrolls number to be revised upward.
Some traders said yesterday they thought current price levels already incorporated the consensus forecast for the employment report.
If the bond market sells off on a report that resembles the consensus forecast, the lower prices represent a buying opportunity, a government coupon trader said.
The September bond futures contract closed 3/8 higher at 105 8/32.
In the cash market, the 30-year 8% bond was 11/32 higher, at 106 23/32-106 27/32, to yield 7.42%
The 7 1/2% 10-year note rose 5/8, to 106 3/32-106 7/32, to yield 6.62%
The three-year 5 7/8% note was up 1/4, at 102 27/32-102 29/32, to yield 4.74%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.18%, the six-month bill down three basis points at 3.27%, and the year bill five basis points lower at 3.42%.
Treasury Market Yields
Monday Week Month
3-Month Bill 3.23 3.25 3.25
6-Month Bill 3.35 3.35 3.35
1-Year Bill 3.53 3.53 3.58
2-Year Note 4.28 4.19 4.33
3-Year Note 4.74 4.65 4.84
5-Year Note 5.68 5.59 5.86
7-Year Note 6.16 6.09 6.38
10-Year Note 6.62 6.60 6.84
15-Year Bond 6.96 6.98 7.20
30-Year Bond 7.42 7.43 7.59
Source: Cantor, Fitzgerald/Telerate