Investors snapped up the $12 billion of 10-year notes the Treasury auctioned yesterday as evidence of a faltering recovery continued to fuel demand for government securities.
"The investor community and the dealer community are very bullish" a government note trader said. "There is that overriding feeling that you have to be in Treasuries here."
The short end of the market managed to post small price gains in spite of the auction, but long-term prices ended slightly lower, with the 30-year off 1/16, where it yielded 8.17%.
The well-bid 10-year sale followed a decent three-year auction on Tuesday.
"The first two legs have gone very well," said Kevin Flanagan, a money market economist at Dean Witter Reynolds. "There has been some good demand so far."
"The [July] employment report renewed the feeling that you could see a double dip, so there's interest in the long end." Mr. Flanagan sa d.
The thrist for paper was so great yesterday that corporations were able to price more than $1 billion of securities. Usually corporate issuance comes to a halt during the quarterly refunding. Traders said the demand for the corporate issues was also good.
The Treasury's 10-years were sold at an average yield of 7.94% and will bear a 7 7/8 coupon, down from the 8.07% average and 8% coupon at the last 10-year sale in May.
The results were better than expected, since traders had estimated the average would come at 7.95%. Instead, only 15% of the bids at that level were awarded.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.53 5.67 5.72
6-Month Bill 5.67 5.89 5.93
1-Year Bill 5.83 6.13 6.24
2-Year Note 6.53 6.77 6.91
3-Year Note 6.89 7.08 7.36
4-Year Note 7.00 7.24 7.55
5-Year Note 7.50 7.73 7.97
7-Year Note 7.78 7.98 8.21
10-Year Note 7.95 8.13 8.32
20-Year Bond 8.15 8.29 8.51
30-Year Bond 8.17 8.33 8.50
Source: Cantor, Fitzgerald/Telerate
The price of the 10-years rose after the bids were in and the yield fell as low as 7.92% during the course of the afternoon. But by late in the day, the new 10-years had traded back to 7.94%.
The statistics showed there was good demand for the notes. The $35.5 billion of bids tendered was a record for a 10-year auction, Mr. Flanagan said. And the $582 million of noncompetitive bids, which are entered mostly by small investors, was also above average.
Yesterday's economic news was of some help to the market, although traders said the numbers were minor ones.
At midday, the Federal Reserve's "beige book" said the economy was improving at a "slow, uneven" rate.
The report, which is prepared as a briefing document for the upcoming Federal Open Market Committee meeting, said while manufacturing payrolls were stabilizing, state and local governments and some service businesses had begun to dismiss workers. Also, the surge in home sales that occurred during the spring is slacking off, according to the report.
Later, the Federal Reserve said the total of consumer installment credit outstanding in June decreased by $1.8 billion, while May's decline was revised to $1.33 billion, much larger than the $626 million reported last month.
Traders said both reports echoed the July employment report's message that the economic recovery is on shaky ground.
Some cited yesterday's drop in commodity prices as another positive factor. The Commodity Research Bureau index fell 1.39 points, to 211.38, with declines occurring in the prices of grains and orange juice.
Although the first two auctions have gone smoothly, some participants questioned whether the market would be able to polish off today's $12 billion of 30-years as smoothly.
"The 30-years are traditionally the most difficult to place and the 10-year [sale] may have siphoned away some demand," Mr. Flanagan said.
He pointed out that investors looking for yield could have picked up most of the steepening in the curve by buying the 10-years yesterday at 7.94%. The 30-years as only slightly more, with the when-issued bond quoted at 8.15% late yesterday.
The government note trader was more optimistic.
"The first two have gone relatively well and there is absolutely no selling," he said. "As long as there's no selling, the market will hold in."
Tomorrow's producer price report for July may scare some investors away from the 30-years, traders said, since the market has priced in a favorable number, if the July index is not that to slightly lower, Treasury prices could fall sharply, especially at the long end, they said.
The September bond future contract end unchanged, at 96 23/32.
In the cash market, the 30-year 8 1/8% bond was 1/16 lower, at 99 9/32-99 12/32, to yield 8.17%.
The 8% 10-year note rose 1/32, to 100 6/32-100 10/32, to yield 7.95%.
The when-issued 6 7/8% three-year note was up 1/32, at 99 28/32-99 30/32, to yield 6.89%, down from 6.92% average at Tuesday's auction.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 5.39%, the six-month bill two basis points lower at 5.45%, and the year bill six basis points lower at 5.52%.