Treasury prices ended lower Friday, with short- and intermediate-term notes suffering the biggest losses, as some upbeat economic news convinced participants that the chances for another Fed easing were slim.
Late in the day, the when-issued 30-year bond was off 1/8 to yield 7.57%, while note prices were Off 1/4 to 5/8 point.
The session's price activity was frantic, as traders and investors reacted to a string of mostly unfriendly economic numbers.
October consumer prices rose 0.4%, instead of the 0.2% gain the market expected; October retail sales jumped 0.9%; and the University of Michigan's preliminary measure of November consumer sentiment surged to 83.6 from 73.3 in October.
Through all the volatility, though, the long end managed to hold its ground better than the short end. Traders said the long end's performance was particularly impressive given that the Treasury sold 10-year notes and 30-year bonds last week.
As the bond held steady and the short end floundered, the yield curve flattened dramatically. For example, the long bond's yield advantage over the two-year note narrowed to 299 basis points Friday, down from 318 late Thursday and from a 329 spread a week earlier.
Traders said participants were abandoning the short end and moving out the yield curve because of the perception that the Fed was through easing. There are also worries about the supply that is coming up at the short end, including the $14.25 billion of year bills and the following week's two-year and five-year auctions.
Short-term traders are particularly worried about what banks will do. Banks have been big buyers of notes over the last couple of years, but traders worry that with lending apparently picking up, banks will stop showing up at note auctions and may even start liquidating some of their current holdings in order to get more cash to lend customers.
Traders say the prognosis for the short end is poor and the curve is likely to flatten even more.
"There are still guys who say, ~Let's buy the curve, it's come in a lot,' but I think that trade is over." a bond trader said. He estimated the coupon curve could flatten another 25 to 50 basis points by the end of the year.
Even though traders are talking about the curve flattening, they are not looking for much improvement at the long end. Most think the bond would have a hard time breaking below the 7.50% yield level.
"The economy is slowly turning around and once it gets going, the market will go lower," another bond trader said. "But the long end will hold up longer, while the front end drops like a stone."
Even though the Treasury market sold off Friday, Long-term prices were still posting gains on the week.
Analysts said the gains occurred because the market was reversing its sell-off in recent weeks on exaggerated worries about a Clinton presidency and the supply.
Carol Stone, senior economist at Nomura Securities, said she expects the market to trade sideways until it gets more information on President-elect Clinton's plans.
"I don't see any reason for the market to move one way or the other," Stone said. "In coming weeks, it's just a waiting game until we see who shows up in the administration and the details of Clinton's economic proposals."
The Treasury market sold off immediately Friday morning when the 0.4% rise in October consumer prices crossed traders' screens. But analysts said the sharp rise in October prices did not change their view that inflation is generally trending lower.
That 0.4% rise was the biggest monthly increase in consumer prices since March. The core rate of inflation, excluding food and energy costs, was up 0.5%. The consensus forecast called for a 0.2% increase in both measures.
"The report itself showed pretty broad-based increases, but I still don't think it's indicative of what's going to come," said Martin Mauro, a senior economist at Merrill Lynch & Co. "Just looking at the forward indicators, they're all very encouraging, with commodity prices flat or down and labor costs increasing very slowly."
Contributing factors included a 0.5% rise in energy prices, a 0.4% gain in housing costs, and a 7.9% rise in airfares. Analysts said airfares were volatile, and questioned the validity of the increase in housing costs.
The October retail sales report was also a little stronger than expected.
Last month's sales increased 0.9%, in line with predictions of a 0. 7% gain. Most of the strength was in autos; excluding autos, sales were up 0.4%.
Most categories of sales showed increases. Furniture sales rose 2.0%, department store sales were up 0.9%, and general apparel sales were up 1.4%.
"Basically, you're looking at outright strength in department store sales and clothing sales and also strong numbers for auto dealerships, up 2.9%," said John Lonski, a senior economist at Moody's Investors Service. "These are brisk readings, and the only thing holding down the number was the weakness in gas station sales and another decline in restaurant sales."
Later in the morning, the bond market got more bad news when the University of Michigan told its subscribers that its preliminary November index of sentiment had jumped to 83.6 from 73.3 in October.
The Michigan survey also showed current conditions surged to 96.7 in November from 82.5 in October, and expectations rose to 75.1 from 67.5.
The market got some consolation during the afternoon from the weak car sales. Auto manufacturers' reported sales during the first 10 days of November were running at a 5.6 million annual pace.
That was a sharp drop from the 6.6 million rate in late October and well below the 6.1 million pace economists had been predicting. But the healthy 4.8 million annual sales pace for light trucks offset the weakness in autos to some extent.
Prices inched a little lower late in the day when the Federal Reserve Bank of New York released the weekly money supply statistics.
According to the New York Fed, the nation's M1 money supply rose $8.3 billion to $1 billion in the week ended Nov. 2; the broader M2 aggregate jumped $11.9 billion, to $3.5 trillion; and M3 increased $4.8 billion, to $4.2 trillion, in the same period.
The December bond futures contract closed unchanged at 103 15/32.
In the cash market, the when-issued 7 5/8% 30-year bond was 6/32 lower, at 100 15/32-100 19/32, to yield 7.57%.
In when-issued trading, the 6 3/8% 10-year note fell 3/8, to 96 24/32-96 28/32, to yield 6.81%.
The when-issued three-year 5 1/8% note was down 14/32, at 99 28/32-99 30/32, to yield 5.14%.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 3.09%, the six-month bill up seven basis points at 3.35%, and the year bill 10 basis points higher at 3.53%.
Treasury Market Yields
Friday Week Month
3-Month Bill 3.13 3.11 2.95
6-Month Bill 3.43 3.35 3.10
1-Year Bill 3.65 3.57 3.29
2-Year Note 4.58 4.46 3.99
3-Year Note 5.14 4.94 4.49
5-Year Note 6.02 6.02 5.52
7-Year Note 6.44 6.52 6.09
10-Year Note 6.81 6.95 6.57
30-Year Bond 7.67 7.75 7.52
Source: Cantor, Fitzgerald/Telerate