Treasury prices continued to coast higher yesterday on the wave of bullishness created by last week's big plunge in June nonfarm payrolls.
Traders said the Treasury market also benefited yesterday afternoon from events in other securities markets.
A drop in stock prices lent a bid to short-term Treasuries, while the success of many of yesterday's new corporate issues allowed dealers to cover short positions in Treasuries, they said.
By late in the afternoon 30-year bond was up 1/4 point to yield 7.59%, while short- and intermediate-term prices had gained 1/4 to 3/8 point.
For the third session in a row, traders reported good buying of short- and intermediate-term Treasury securities, as investors reacted to the economic weakness depicted by the employment report and to the Federal Reserve's subsequent lowering of two key interest rates.
The head of a government trading desk said the bond market added to its gains in mid-afternoon as corporate dealers realized that the abundant supply of new corporate bonds was finding buyers.
About $4 billion of corporate bonds were priced yesterday as corporations rushed to take advantage of the lower rates.
"I hear a lot of the corporate issues were cleaning up and they were taking hedges back," the desk head said. Corporate dealers often hedge their inventories of corporate bonds by establishing short positions in the Treasury market.
"A lot of the corporate issuance did get placed, so shorts were lifted," a coupon trader agreed.
The trader added that the stock market's drop late yesterday afternoon had given the short end of the bond market its next "turbo boost."
The Dow Jones industrial average declined rapidly late in the day and closed 44.03 points lower at 3,295-17.
That late boost at the short end only exacerbated the steepening of the yield curve that has been occurring since the employment report, as short- and intermediate-term Treasuries outpaced the long end of the market.
Late yesterday, the 30-year bond was yielding 326 basis points more than the two-year note, up from 317 basis points late yesterday. Last Wednesday, the day before the employment report was released, that spread stood at 293 basis points.
Traders say there are plenty of reasons for the long end to lag the rest of the market.
Short-term prices trade much more close with the funds rate, while the long end is more interested in economic fundamentals and inflation. Many economists have questioned whether the plunge in June nonfarm payrolls was really as bad as it looked. They argue that a lot of the weakness had to do with faulty seasonal factors.
Meanwhile, supply is reentering the picture at the long end. The Treasury will sell $9.75 billion of seven-year notes today, an auction that some traders regard as a trial run for the quarterly refunding in early August. Traders are also worried that Friday's June producer price report could show outsized gains.
A bond trader said he thought part of the problem was political uncertainty. "People don't want to invest in the long end if they could have a Democratic president in six months," the trader said.
And a bill trader said the reluctance to buy bonds, and the resulting steepness in the yield curve, showed investors' nervousness about the size of the federal deficit. "The yield curve tells me the market is beginning to reject the debt," the trader said.
The Treasury market showed little reaction to the latest Johnson Redbook report on department store sales, which showed sales for all of June were up only 0.1% from May, but 7.9% higher than last June's sales.
Today's Seven-Year Sale
Traders were cautiously optimistic about today's auction of $9.75 billion of seven-year notes.
Participants who expect the historically low yields on short-term Treasuries to force investors to extend the maturity of their holdings say such extension trades should benefit the seven-year sale.
The sales manager for one primary dealer said arbitrage players should also be interested in the seven-years because the issue is cheap compared to other maturities.
But he said investors may be disconcerted by talk that the coupon yield curve could steepen out to 350 or 400 basis points, from the 326 basis point slope late yesterday.
That kind of steepening would translate into a higher yield and lower price for the seven-year note, so the talk may scare some investors away from the auction, the sales manager said.
The desk head argued that retail investors have tended to avoid auctions in the wake of the Salomon scandal. The retail demand for the seven-years might have been fueling the market yesterday, he suggested.
Late yesterday, the when-issued seven-years were bid at 6.41%, down from 6.47% late Monday.
The September bond futures contract closed unchanged at 102 20/32.
In the cash market, the 30-year 8% bond was 1/4 higher, at 104 19/32-104 23/32, to yield 7.59%.
The 71/2% 10-year note rose 5/16, to 104 17/32-104 21/32, to yield 6.84%.
The three-year 5 7/8% note was up 5/16, at 102 21/32-102 23/32, to yield 4.84%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.20%, the six-month bill off five basis points at 3.27%, and the year bill eight basis points lower at 3.46%.Treasury Market Yields Prev. Prev. Tuesday Week Month 3-Month Bill 3.25 3.63 3.746-Month Bill 3.35 3.76 3.921-Year Bill 3.58 4.03 4.172-Year Note 4.33 4.81 5.073-Year Note 4.84 5.29 5.634-Year Note 5.87 6.26 6.575-Year Note 5.86 6.27 6.577-Year Note 6.38 6.70 6.9510-Year Note 6.84 7.11 7.3215-Year Bond 7.20 7.44 7.6030-Year Bond 7.59 7.77 7.87 Source: Cantor, Fitzgerald/Telerate