A moderate November inflation report and more talk out of Washington about cutting back on bond issuance helped long-term and intermediate Treasury prices end higher yesterday.
Late in the afternoon, the 30-year bond was up 5/8 point to yield 7.74%, while short-term notes were unchanged or marginally lower on the day.
The market got off to a good start yesterday morning when a 0.2% increase in November producer prices calmed inflation fears and indicated the path was clear for another easing by the Federal Reserve.
But long-term prices posted their biggest gains at midday after Treasury Secretary Nicholas Brady told the Senate Finance Committee the
Treasury Market Yields
Thursday Week Month
3-Month Bill 4.25 4.44 4.74
6-Month Bill 4.31 4.51 4.86
1-Year Bill 4.44 4.59 4.93
2-Year Note 5.02 5.23 5.58
3-Year Note 5.37 5.59 5.91
4-Year Note 5.50 5.70 6.02
5-Year Note 6.21 6.30 6.60
7-Year Note 6.70 6.74 6.98
10-Year Note 7.17 7.19 7.33
15-Year Bond 7.48 7.52 7.63
30-Year Bond 7.74 7.82 7.81
Source: Cantor, Fitzgerald/Telerate
government was "looking at" selling more short-term and fewer long-term securities to take advantage of the steep yield curve.
Mr. Brady was responding to a question from Sen. Lloyd Bentsen, D-Tex., who asked whether the Treasury was planning to take advantage of the unusually large disparity between short-term and long-term rates.
"We're looking at it," Mr. Brady said, but he added that long-term securities currently comprise only 7.5% of the Treasury's total issuance.
Some economists have advocated cutting back on long-term issuance, arguing that it would lower long-term yields and stimulate the economy.
Mr. Brady's comment yesterday was just as noncommittal as his remark a week earlier, but bond prices immediately added 1/4 point as participants who had short positions at the long end rushed to cover their positions.
Bond traders said it seemed likely the Treasury would reduce bond auctions but not eliminate them.
"By the fact that they keep talking about it, it's obvious it's being considered," one bond trader said.
He thinks the Treasury might cut bond auctions by a quarter or a third. The last 30-year sale in November totaled $12 billion.
Another bond trader was more conservative. "I could see them doing $10 billion instead of $12 billion, but I don't see them reducing it much more than that," he said, citing the hefty deficit.
Most of the day's activity took place at the long end, a note trader said. "The bond did significantly better, nothing else did much."
One problem for the short end was worries about how the Treasury would offset a reduction in bond issuance, he said. Rumors around the market included selling year bills every week instead of every month, auctioning three-year notes monthly instead of once a quarter, and reinstating the four-year note.
The 0.2% increase in the November producer price index was in line with expectations, as was the 0.3% rise in the core rate, excluding food and energy costs.
But the November numbers represented a hugh improvement over October's 0.7% increase overall and 0.5% jump in the core rate, making it clear the October gains were an aberration, rather than the start of a troublesome new price trend, said Brian Fabbri, chief economist at Midland Montagu.
Martin Mauro, a senior economist at Merrill Lynch Capital Markets, said the producer price report was even better than it looked at first glance, since the index rose only 0.2% despite some big gains in certain components, including a 1.3% gain in passenger car prices, a 1.2% rise in tobacco prices, and a 23.6% jump in vegetable prices.
"At the very least, this takes away the sting from the big increase" in October, Mr. Mauro said. "But I think it suggests even better news going forward."
The other indicators released yesterday looked less friendly for the market.
November retail sales rose 0.3%, when the street consensus had been for a 0.1% decline, and initial jobless claims for the week ending Nov. 30 fell 61,000, to 414,000, when the market had expected only a 30,000 decline.
The market dismissed the drop in new jobless claims as the result of the Thanksgiving holiday, which closed state unemployment offices.
But some economists saw the increase in retail sales as evidence that talk about the stagnant economy and limp consumer spending has been over blown.
Worries that "the Grinch was going to steal Christmas have somewhat faded with this report," said David Wyss, chief financial economists at DRI/McGraw Hill.
Mr. Wyss said the retail sales report made it less likely the Fed will ease again soon.
But Brian Fabbri pointed out that adjusted for inflation, the sales figures were flat, after having shown little life in previous months.
He said the numbers showed consumer demand remains weak and that weakness in demand makes it unlikely inflation will rebound in coming months.
The two reports taken together "basically tell the Fed that without inflation, they may as well go ahead and ease in order to try and stimulate economic activity," Mr. Fabbri said.
He expects additional easing moves to be approved by Fed policymakers when they meet next Tuesday and Wednesday and put into effect sometime in the following month.
In other news from Washington, Robert Glauber, a Treasury under-secretary, said yesterday a study of Treasury market practices prompted by the Salomon Brothers scandal will not be released until January.
The report, a joint effort of the Treasury, the Securities and Exchange Commission, and the Fed, originally was scheduled to be released today.
Today's index of November consumer prices is expected to be as well behaved as yesterday's producer price index. The consensus forecast is for a 0.3% increase in both the index and the core rate, excluding food and energy prices.
But one bond trader said the long end's gains might be limited unless the short end perks up.
"The market's got a pretty good bid," he said. "But for the long end to be explosive, you'd have to have a good number and some buying in the short end."
Also today, car manufacturers will report their sales figures for the first 10 days of December. Economists are forecasting a 6.0 million annual sales pace, down from the 6.3 million rate in late November.
The New York Fed's report of increases in all three monetary aggregates had little effect on the Treasury market yesterday.
A spokesman for the Federal Reserve Bank of New York said at the bank's weekly press briefing that the nation's M1 money supply rose $11.5 billion to $901.9 billion in the week ended Dec. 2; the broader M2 aggregate gained $3.5 billion, to $3.4 trillion; and M3 increased $900 million, to $4.2 trillion, in the same period.
And traders said the big slide in gold prices had little effect on Treasuries. Gold ended $8.25 lower at $357.50.
Earlier, there was moderate demand for the Treasury's auction of $12.25 billion of year bills. The bills were sold at an averate rate of 4.20%, the lowest since February 1972.
The March bond future contract closed 9/16 higher at 100 31/32.
In the cash market, the 30-year 8% bond was 5/8 higher, at 102 26/32-102 30/32, to yield 7.74%.
The 7 1/2% 10-year note rose 3/16, to 102 5/32-102 9/32, to yield 7.17%.
The three-year 6% note was up 1/32, at 101 19/32-101 21/32, to yield 5.37%.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 4.16%, the six-month bill up two basis points at 4.17%, and the year bill three basis points higher at 4.26%.
Also, for the week ending Wednesday, the federal funds rate average 4.54%, down from 4.79% the previous week, according to the New York Fed.
Staff reporter Joan Pryde contributed to this column.