Prices Continue to March Higher On Soft Home Sales, Retail Buying
More favorable economic news and continued buying by retail investors yesterday allowed the Treasury market to rally for the third session in a row.
As prices rose, the 30-year bond broke through 8% yield level, which has been a key barrier all year. But when the Fed announced an upswing in the money supply late in the day, the market retreated and the long bond ended up right at 8%, having posted a 5/8 point gain on the day.
The market began to improve after the weekly jobless claims figure was released, even though the Labor Department reported a 9,000 decline in claims to 421,000, in line with expectations.
Analysis said that since there was no negative news in the report, the market felt free to continue its rally.
"The claims number wasn't good, but it wasn't bad either, so it doesn't change the trend," said Dan Seto, an economist at Nikko Securities Company International. "The market just wants to go and it's ignoring everything in its path."
Mr. Seto said the success of this week's two-year and five-year auctions and the widespread belief that the Fed will ease again soon were also helping the market.
Steven Ricchiuto, an economist at Barclays de Zoete Wedd Government Securities, pointed out that since the next coupon auctions will not be held until late September, "this is the most opportune time for the market to try to break through 8%" on the long bond.
Later in the morning, the market got some favorable economic news, in the form of an 8.5% drop in new home sales.
The Commerce Department also said it had revised the June gain down to a 4% rise from the 7.4% jump reported last month.
The July drop and the June revision combined to push the July rate to 479,000 units on an annual basis, the lowest since January. Economists had expected a pace of about 525,000.
The soft home sales are notable partly because the housing sector usually is one of the first parts of the economy to recover from recession.
"Clearly the housing sector is having a tough time coming out of the doldrums," said Brain Wesbury, vice president of Chicago Economics. "Even though we had a slight drop in mortgage rates in July, it appears it wasn't enough."
Peter D'Antonio, an economist at Citibank, said the lackluster housing number was in line with other information showing personal income growth has stalled and consumer confidence has not snapped back.
The other indicator yesterday, July income and spending, came in as expected. Personal income declined 0.1% in July, but that deterioration had already been signaled by the July employment report. July spending rose 0.4%.
Stephen Roach, an economist at Morgan Stanley, said the July income and spending levels still showed a big improvement from the second-quarter averages. For example, the level of personal consumption was 3.7% higher, on an annual basis, than the average level during the second quarter.
That improvement is especially significant since personal spending makes up such a large part of gross national product, Mr. Roach said.
Analysts said the mixed statistics that have been seen recently are typical of economic turning points. But the confusion that results when durable goods orders jump 10.7% while home sales plunge 8.5% means that next week's August employment report will be a key one for the bond market, they said.
Late in the day, the Federal Reserve Bank of New York reported that the nation's M1 money supply $2.1 billion to $864.9 billion in the week ended Aug. 19; the broader M2 aggregate gained $3.7 billion, to $3.4 trillion; and M3 increased $3.9 billion, to $4.2 trillion, in the same period.
The M2 measure had gotten some attention last week when its losses sent it below the lower growth limit set by the Fed, since traders hoped that would encourage a Fed easing. But yesterday's increase put M2 growth back inside the Fed's target range.
Traders said yesterday's gains reflected the retail buying and extension trades that have gone on all week.
"You get into markets like this and news doesn't really matter," a government note trader said. "It's just people trying to get involved."
The market may be vulnerable tomorrow morning, when the July leading indicators and factory orders are both expected to show big gains. Economists surveyed by The Bond Buyer expect a 5.6% rise in July factory orders and a .7% increase in July leading indicators.
Given the steady buying this week, even at the highs, "you could have some badly positioned people" who will try to get out on an unfavorable number, the note trader said. "We could easily lose a point."
Other traders said that since the gains in both indicators will be partly due to the strength in July durable goods, which already caused a sell-off last Friday, the market expects the increases.
The Federal Reserve report on bank lending practices that was released yesterday afternoon had no effect on Treasury prices.
The Treasury's auction of $5 billion of 16-day cash management bills went well. There were six times as many bids as there securities being sold, and the issue came at an average rate of 5.38%.
The September bond future contract closed 5/8 point at 98 24/32.
In the cash market, the 30-year 8 1/8% bond was 9/16 higher, at 101 8/32-101 12/32, to yield 8.00%.
The 7 7/8% 10-year note rose 3/8, to 100 24/32-100 28/32, to yield 7.74%.
The three-year 6 7/8% note was up 3/32, at 100 23/32-100 25/32, to yield 6.57%.
Rates on Treasury bills were mixed, with the three-month bill unchanged at 5.30%, the six-month bill down one basis point at 5.31%, and the year bill up one basis point at 5.36%.
Also, for the week ending Wednesday, the federal funds rate averaged 5.52%, down from 5.68% the previous week, according to the New York Fed.