U.S. Treasuries securities were flat or rose slightly yesterday as prices held to their Friday lows, with no new word on inflation to lure either buyers or sellers back into the market.
The day's slightly higher levels resulted largely from a technical correction as players covered short positions. Traders would have liked seeing the market go higher yesterday so they could set up more shorts, but that did not happen.
"It's very quiet. There's nothing going on at all," a bond trader said. "It's a matter of the market waiting to see some sign of direction out of Washington."
That direction could come as early as Sept. 27, when the Federal Open Market Committee meets. The last time the FOMC met on Aug. 16, it raised the federal funds rate 50 basis points to 4.75%.
Consensus had held that the Fed would not tighten until Nov. 15. But recent inflationary news has indicated the economy is not slowing despite a total Fed tightening of 175 basis points since February. So analysts now say the FOMC could very well tighten again at its September meeting.
August housing starts is the number this week that might move the market, said Kevin Flanagan, a vice president and financial economist at Dean Witter Reynolds Inc.
The Wednesday annualized starts figure is likely to be down slightly to 1.4 million from the 1.415 million July pace, according to economist Philip Braverman in a credit market report for DKB Securities Corp. He cited "a continuing response to the rise in mortgage rates, the sharply reduced pace of h6me mortgage refinancing, slow wage gains, slowing employment gains, and the rise in taxes."
For now, Hanagan said: "Caution is the watchword. The market's on a hold pattern, trying to reassess numbers from past weeks."
The bond market's primary concerns include higher commodities prices, a weaker dollar, and inflationary economic indicators pointing to strength in auto sales, employment gains, and robust activity in manufacturing.
A Richmond Federal Reserve Bank manufacturing survey released yesterday left the market cold, even though district manufacturers predicted moderate inflation
in both raw materials and finished goods prices in the next six months.
Last Friday, the Fed reported a 0.7% August rise in industrial production. It also said that the capacity utilization rate in manufacturing hit 84.7%, far above economists' consensus figure of 84.1%. The number had not seen such highs since April 1989, and the market sold off as a result.
"Though most of the production spike was due to a reversal of a fourmonth drop in car and truck production, the markets misread this spike as confirming a sustained bounce-back in economic activity," Braverman said.
However," he continued, 'tstrengthening production and orders are not sustainable without a parallel strengthening in sales, which remains both absent and a highly unlikely prospect even with a potential uptick in exports."
On Sept. 9, the producer price index for August showed its biggest gain since October 1990, up 0.6% instead of the expected rise of 0.4%. Again, the market sold off.
"We're in an oversold condition," Flanagan said. "I wouldn't be surprised to see an upward move in prices over the next couple of days."
Once participants have digested the inflationary numbers, they may reconsider the three concurrent Friday selloffs the market has experienced so far this month.
As of yesterday, however, the long bond had not come down off the 7.75% yield it reached Friday, which may signify that it has entered a new trading range. If the long end stays at its new highs for the year and the short end remains tied to the federal funds rate; the yield curve will continue to steepen.
The benchmark 30-year Treasury bond closed up 3/32 yesterday to yield 7.75%.
The 10-year Treasury note was up 2/32 to yield 7.48%. The seven-year note was up 3/32 to yield 7.30%, and the five-year was unchanged at 7.10%.
The yield on the three-month bill was down one basis point to 4.68%. The yield on the six-month bill was unchanged at 5.20%, and the yield on the one-year was unchanged at 5.77%.
The December Treasury bond futures contract closed up 14/32 at 99.22.