Intermediate and long-term prices fell yesterday after retail investors turned up their noses at the Treasury's sale of $12 billion of 30-year bonds, the last of this week's three refunding auctions.
Late in the day, the 30-year auctioned in May was off 1/2 point to yield 8.22%.
"The auction did not go well," said Michael Strauss, an economist at UBS Securities.
Retail buying fueled the Treasury market's advances in recent weeks. And the two earlier refunding auctions, Tuesday's sale of $14 billion three-year notes and Wednesday's sale of $12 billion 10-years, both were well bid. But yesterday afternoon, supply finally outpaced demand.
Mr. Strauss said "sticker shock" may have scared investors away, since the price of the 30-year was at three-month highs going into the auction.
And a lot of the buying power in the market may have been soaked up as the market rallied, he said. "People who needed to buy bonds have already put their money to work," he added.
The when-issued bond was trading at 8.15% when bids were entered, but the auction results showed dealers had bid back, with the issue coming at an average yield of 8.17%.
The issue will bear an 8 1/8% coupon, matching the 30-year sold in May. The May bond sale came at an average of 8.21%.
Some dealers won bonds at even higher yields, and lower prices, yesterday; the Treasury accepted bids as high at 8.19%, with 96% of the bids at that level filled.
Other auction statistics confirmed that the demand for the issue was weak. Small investors entered only $199 million of noncompetitive bids, far below the $377 million average fo r this auction in recent years. And only 1.76 bids were entered for every bond to be sold, also anemic by 30-year standards.
The market began to move lower once the bids were in and the sell-off accelerated after the results were announced.
"I think it's Street liquidation," a government coupon trader said. "You've got guys who got caught long and are reevaluating their positions."
"The auction just kind of overwhelmed some people," a note trader said, adding that most of the selling occurred at the long end and in five-year notes.
By late yesterday, the price of the when-issued 30-year had fallen enough to push the yield up to 8.22%, from the 8.17% auction average.
Treasury bills and short-term notes outperformed the rest of the market during the morning and managed to hold onto a small part of those gains during the afternoon.
The short end got a head start overnight from reports of a run on Citibank's Hong Kong branches and some bullish comments by Robert Parry, president of the San Francisco Fed.
Hong Kong customers withdrew deposits from Citibank branches both Wednesday and yesterday after a newspaper article repeated a U.S. congressman's assertion last week that the bank was "technically
Treasury Market Yields
Thursday Week Month
3-Month Bill 5.51 5.69 5.71
6-Month Bill 5.64 5.91 5.93
1-Year Bill 5.79 6.16 6.23
2-Year Note 6.49 6.80 6.87
3-Year Note 6.89 7.08 7.31
4-Year Note 6.98 7.25 7.49
5-Year Note 7.52 7.73 7.92
7-Year Note 7.82 7.99 8.15
10-Year Note 7.97 8.16 8.27
20-Year Bond 8.21 8.32 8.46
30-Year Bond 8.22 8.35 8.46
Source: Cantor, Fitzgerald/Telerate
insolvent." Citibank and FDIC chairman William Seidman have denied that is true.
In any case, the Citibank story elicited some flight-to-quality buying. Meanwhile, short-term traders hoping for more easing from the Fed liked a story on Knight-Ridder Financial News wire that Mr. Parry said the Fed is more worried about the state of the economy than inflation and will ease further if the indicators show it is necessary.
Mr. Parry is currently a voting member of the Federal Open Market Committee.
Later in the day, though, another wire service said an official at the San Francisco Fed questioned Knight-Ridder's account.
The second story "took the wind out of the market's sails," the coupon trader said.
The manager of a government trading desk said the short end got a boost because accounts sold several billion dollars worth of long-term paper and put that money in the short end.
The news of a small decline in jobless claims had little effect on the Treasury market yesterday morning.
The Labor Department said new claims fell 4,000, to 400,000, in the week ended July 27,. And in the previous week, the number of people receiving state benefits was off 17,000, to 3.289 million, the department said.
Nor did the money supply data have much affect.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply rose $4.3 billion, to $864.4 billion in the week ended July 29; the broader M2 aggregate declined $200 million, to $3.4 trillion; and M3 dropped $300 million, to $4.1 trillion, in the same period.
The September bond future contract closed 17/32 lower, at 96 6/32.
In the cash market, the 30-year 8 1.8% bond as 9/16 lower, at 98 10/32, to yield 7.97%, and the three-year 6 7.8% note was unchanged, at 99 28/32-99 30/32, to yield 6.89%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 5.37%, the six-month bill off two basis points at 5.42%, and the year bill three basis points lower at 5.49%.
Also, for the week ending Wednesday, the federal funds rate averaged 5.83%, up from 5.79% the previous week, according to the New York Fed.