Most Treasury note and bond prices ended slightly lower yesterday after the five-year auction drew only a lukewarm response from investors.
Late in the day, the 30-year bond was off 1/8 point to yield 7.48%.
The $10.5 billion of five-years was sold using-the single-price, or dutch auction, bidding method. The Treasury plans to experiment with the new bidding procedure at two-and five-year auctions for the next year; yesterday's sale was only the second time it had been used.
Under the new bidding method, all the notes were sold at the highest accepted yield of 5.54%.
That is the lowest yield on a five-year note since the Treasury started selling them in 1977. The new notes will bear a 5 1/2% coupon.
The median bid at the auction was 5.50% and the low was 5.45%. Dealers who entered bids at the stop-out yield of 5.54% got 57% of what they requested.
The results were a surprise to traders, who had expected the notes to come nearer the 5.51% level at which they were trading at the bidding deadline.
When dealers found they had been awarded more securities than they wanted, they tried to sell them in the secondary market. That selling pushed prices lower all along the curve after the results came out, and late yesterday the yield on the when-issued five-year had risen to 5.55%.
"This was a lousy auction," said Ward McCarthy, a managing director at Stone & McCarthy Research Associates, an economic consulting firm in Princeton, N.J. "Bidding was very thin and obviously quite Sloppy, and the issue came 2 1/2 to three basis points behind where it was trading at auction time."
"Clearly there wasn't as much demand for the five-year as for the two-year" notes that were sold Tuesday, said Matthew Alexy, a money market economist at First Boston Corp. Still, he said, the auction was not a disaster.
Mr. Alexy said yesterday's auction might have suffered because dealers had not set up as many short positions in the five-year notes.
Analysts said the mediocre auction also reflected the market's other problems, and especially the uncertainty caused,by the turmoil in world currency markets and nervousness about the upcoming presidential elections.
Mr. McCarthy said the market's nervousness was evident in the increasing cash allocations of the portfolio managers surveyed weekly by his firm.
In the most recent survey, the average cash allocation had risen to 9.4% from 6.25%.
"That's a big one-week move," he said. "When times are uncertain, money managers like cash, and that's beginning to show up."
Traders said the change in bidding procedures had created so much confusion that it was difficult to assess the auction results.
But they said that even though some dealers ended up owning five-years they had not planned to buy, many others are benefiting from the new system.
"The Street did great," a note trader said. "Guys bid them at 5.48% or 5.49%, and got to buy them at 5.54%."
A coupon trader termed the single-price bidding method "a giveaway."
Mr. McCarthy said he thought the short end of the Treasury market should perk up soon because current yield levels are attractive in light of the persistently sluggish economic growth.
But he said the long bond was a "different animal," and would probably continue to languish.
Long-term prices fell more than a point Tuesday after an Argentinian official said his country plans to buy the zero coupons it needs to defease its $31 billion of debt reduction bonds directly from the Treasury. Some participants had been betting Argentina would buy the securities it needed in the secondary market.
"The Argentinian situation will weigh heavily on the bonds and the extent of the backup will reflect the volume of reconstitution that occurs." Mr. McCarthy said.
Yesterday morning, the long end came under pressure amid reports of retail selling of 10-year notes and bonds, and some traders linked the selling to the dollar's weakness against the yen.
"The dollar hit the all-time low against the yen and that's when we cracked," a short-term trader said. "The rumors have been that a lot of foreign accounts are active."
The dollar broke through its previous low of 120.25 yen yesterday morning and got down to 119.60 before rebounding. Late yesterday, the dollar stood at 120.20 yen, down from 121.05 late Tuesday.
The market showed little response to the Federal Reserve's "beige book," a compilation of economic reports from the district banks around the nation.
The Fed report says the economy was growing slowly, but the recovery was "uneven."
Jerry Gluck, an economist at Mitsubishi Bank, said that wording was a little more upbeat than the Fed's description of the economy six weeks earlier, which referred only to "uneven" growth.
Still, he said, the assessment did not offer any new information. "We're experiencing a very sluggish recovery and this doesn't suggest anything otherwise."
The market also ignored the mid-September car sales statistics. The sales pace inched up to a 6.1 million annual rate in the middle of the month, up from the six million pace during the first 10 days of September.
Traders and analysts expect the market to try to consolidate in coming days, given the absence of any key economic indicators. Already traders are looking ahead to the September employment report due on Oct. 2, which is seen as the Fed's next opportunity to ease rates.
The December bond futures contract closed 14/32 lower at 103 26/32.
In the cash market, the 7 1/4% 30-year bond was 1/8 lower, at 97 4/32-97 8/32, to yield 7.48%.
The 6 3/8 10-year note fell 1/4, to 98 21/32-98 25/32, to yield 6.54%.
The three-year 4 5/8 note was down 1/32, at 100 12/32-100 14/32, to yield 4.46%.
In when-issued trading, the 4% two-year note was 2/32 higher, at 100 1/32-100 2/32, to yield 3.96%, down from the stop-out rate of 4% at Tuesday's auction.
Rates on Treasury bills were mixed, with the three-month bill steady at 2.93%, the six-month bill two basis points higher at 2.98%, and the year bill one basis point higher at 3.10%.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 2.97 2.94 3.20
6-Month Bill 3.04 2.98 3.32
1-Year Bill 3.19 3.09 3.47
2-Year Note 3.96 3.79 4.25
3-Year Note 4.46 4.32 4.75
5-Year Note 5.53 5.34 5.65
7-Year Note 6.08 5.88 6.18
10-Year Note 6.54 6.37 6.63
30-Year Bond 7.48 7.32 7.41
Source: Cantor, Fitzgerald/Telerate