Most Treasury prices moved a little higher yesterday as the note sector consolidated after two sessions of sharp declines.
Late in the afternoon, the 30-year bond was up 1/2 point and yielded 7.53%, and note prices were up 1/8 to 1/4 point.
Traders said it was a boring day, despite a fair amount of activity.
"It was a good trading day, but there wasn't that much information," a government note trader said. "You had to pick your technical levels and get in and out."
Widespread expectations that the Federal Reserve was about to make a permanent purchase of coupon securities buoyed the market yesterday morning. The Fed usually buys securities for its own account a couple of times during November to add reserves to the monetary system ahead of the holiday season.
"A lot of guys were hoping for a coupon pass to get rid of some of their off-the-run securities," a government coupon trader said.
Prices faded back to Monday's closing levels when the Fed failed to announce a pass by 1 p.m., eastern standard time, but the market soon got its second wind as the year bill auction gave a boost to the short end.
Traders said retail investors showed interest in the bills during the morning, resulting in strong bidding as dealers tried to make sure they covered their short positions. The $14.25 billion of year bills were sold at an average rate of 3.61%, but by late in the afternoon the issue had improved to a rate of 3.57%.
The other good news yesterday afternoon was the Johnson Redbook Report, which says that during the first two weeks of November, department store sales dropped 1%, compared with sales in the same period in October.
Traders were skeptical that yesterday's price improvement represented anything more than a temporary interruption in the market's trend to lower short-term prices. "The short end did better, but we're having trouble getting through some resistance levels," said Peter Mayers, assistant treasurer at Bank Julius Baer. "The recent trend has been one of more pressure in the front end due to a general feeling that we're seeing the beginning of a recovery but there's no real inflation fear.
"The logical follow-through is higher short-term rates and steady long-term rates," Mayers said, adding that the long end was not able to "rally hard because people are waiting to see the new administration's economic proposals."
As short-term prices have fallen in recent days, the yield curve has flattened. Traders noted that even though prices moved higher yesterday, the yield curve reversed only a tiny part of that flattening. Late yesterday, the 30-year bond yielded 293 basis points more than the two-year note, up from 291 late Monday.
"I think the big guys who have put this trade on are in it for the long run," the note trader said. "Overall, the trend [to a flatter curve] is in place."
The coupon trader agreed that some hedge funds were pushing the flattening trade, but said he thought it was the trade of the future. "Whenever we have come out of a typical recession, the yield curve has flattened," the trader said.
The Federal Open Market Committee, which sets Fed monetary policy, met yesterday, but the market ignored that because traders are convinced Fed policy is on hold.
Traders said there should be a little more activity today than yesterday. The consensus forecast for this morning's September trade deficit calls for an $8.8 billion gap, down from the $9 billion August deficit.
Once again, traders will hope for a Fed coupon pass at midday, and during the afternoon the Treasury is scheduled to announce the size of next week's two-and five-year note auctions.
Economists on average expect a $15.25 billion two-year issue, up $250 million from last month's sale, and a $11 billion five-year auction, also up $250 million from last month.
The December bond futures contract closed 1/4 higher at 103 21/32.
In cash 7 5/8% 30-year bond was 3/8 higher, at 101-101 4/32, to yield 7.53%.
The 6 3/8% 10-year note rose to 96 23/32-96 27/32, to yield 6.82%.
The three-year 5 1/8% note was up 5/32, at 99 28/32-98 30/32, to yield 5.14%.
Rates on Treasury bills were mixed, with the three-month bill up three basis points at 3.16%, the six-month bill up one basis point at 3.38%, and the year bill six basis points lower at 3.53%.
TREASURY MARKET YIELDS
Tuesday Week Month
3-Month Bill 3.20 3.12 3.08
6-Month Bill 3.46 3.36 3.32
1-Year Bill 3.64 3.55 3.58
2-Year Note 4.60 4.45 4.30
3-Year Note 5.14 5.06 4.88
5-Year Note 6.03 5.96 5.90
7-Year Note 6.44 6.44 6.45
10-Year Note 6.82 6.86 6.87
30-Year Bond 7.53 7.66 7.64
Source: Cantor, Fitzgerald/Telerate