Treasury prices ended marginally lower yesterday even though the day's main event, the auction of $15 billion of two-year notes, was termed successful.
Traders said the additional supply to be sold today, some uncertainty about the Argentine debt reduction deal, and a report showing a rebound in department store sales all kept a lid on prices yesterday.
Late in the afternoon, the 30-year bond was off 1/16, to yield 7.84%, while some short-term and intermediate notes were as much as 1/8 point lower.
Prices began to slide overseas as dealers prepared for the two-year sale by lightening up at the short end.
Traders said the nervousness Monday about the shaky condition of many foreign stock markets had discouraged dealers from selling short-term paper in anticipation of the auctions.
The market's attempt to cheapen up the issue ahead of auction time apparently was successful, because the two-year sale went well.
The $15 billion of two-year notes were sold at an average rate of of 5.11% and will bear a 5% coupon. That is the lowest yield at a two-year sale since January, when two-year notes were sold at 4.99%, and compares with the 5.13% average yield and 5-1/8% coupon at May's auction.
"The auction results were very strong." said Douglas Schindewolf, a money market economist at Smith Barney, Harris Upham & Co.
"The coverage was good, the amount of noncompetitive tenders was high, and the rate came just around where it was expected to come at auction time."
The Treasury received $44.82 billion of bids for the notes, resulting in a bid-to-cover ratio of 2.98 to 1. Noncompetitive bids, which are usually entered by small investors, totaled $1.251 billion, up from $1.059 billion in May.
The price of the new two-year notes improved a little more in the secondary market after the results were announced. Late yesterday, the notes were yielding 5.08%, down from the 5.11% auction average.
While the short end concentrated on supply, long-term prices drifted as traders tried to sort out what was happening with Argentina's plan to restructure about $20 billion of bank debt.
Bond traders have been following the Argentine deal closely because Argentina plans to buy stripped Treasuries to defease the bonds it will issue in the restructuring. The key question is whether Argentina will buy the securities it needs directly from the Treasury or go into the secondary market, where its purchase would likely impact prices.
Bond prices briefly moved higher late in the morning after Reuters reported that Argentina would release the term sheet for its debt restructuring yesterday.
Some traders argued that it was far too early to learn anything concrete about the deal, since it is not expected to close until the end of the year.
Treasury prices moved lower yesterday afternoon despite the good auction results on reports that the Johnson Redbook Service said department store sales in the week ended June 20 were up 24% from the previous week.
For the first three weeks of June, the Johnson Redbook survey showed sales were up 2.0% on a seasonally adjusted basis from the same period in May.
Today, the Treasury will sell $10.5 billion of five-year notes.
Mr. Schindewolf said the "strong demand for the twos suggests there will be strong demand for the fives."
Late yesterday, the when-issued five-year notes were bid at 6.48%. Traders said the issue would do better if the yield rose above 6.5%.
The preparation for today's auction will be complicated by some economic news. The May durable goods report will be released at 8:30 a.m., eastern daylight time, and manufacturers' reports on mid-June car sales will be released over the course of the day.
Economists surveyed by The Bond Buyer on average expect a 0.8% increase in May durables orders, following the 1.4% gain in April, and a 6.4 million annual pace for mid-month car sales.
The durable goods series is notoriously volatile, though. "One or two aircraft orders that people weren't expecting can really push the numbers around," Mr. Schindewolf said.
The September bond futures contract closed 11/32 lower at 99-22/32.
In the cash market, the 30-year 8% bond was 1/16 lower, at 101-22/32-101-26/32, to yield 7.84%.
The 7-1/2% 10-year note fell 1/32, to 101-24/32-101-28/32, to yield 7.23%.
The three-year 5-7/8% note was down 3/32, at 100-28/32-100-30/32, to yield 5.51%.
Rates on Treasury bills were higher, with the three-month bill up one basis point at 3.68%, the six-month bill up two basis points at 3.79%, and the year bill two basis points higher at 4%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.74 3.71 3.79
6-Month Bill 3.89 3.84 3.97
1-Year Bill 4.15 4.09 4.25
2-Year Note 4.96 4.97 5.32
3-Year Note 5.47 5.48 5.86
4-Year Note 6.42 6.39 6.74
5-Year Note 6.43 6.41 6.77
7-Year Note 6.82 6.81 7.09
10-Year Note 7.22 7.21 7.43
15-Year Bond 7.50 7.50 7.70
30-Year Bond 7.84 7.82 7.91
Source: Cantor, Fitzgerald/Telerate