The Treasury market's mood improved yesterday as more weak statistics reinforced the picture of an economy that is still struggling to get back on its feet.
The lackluster indicators paved the way for a decent five-year auction, and the market closed with most of the day' sgains intact.
Late in the afternoon, the 30-year bond was up more than 1/2 point to yield 8.02%, and short-term notes were 1/8 to 1/4 point higher.
The market got off to a good start yesterday morning when both the September durable goods number and the initial claims report showed more weakness than expected.
The reminders that the economy is still struggling to get back on its feet offset the market's recent worries that federal tax cuts will add to the deficit and to inflationary pressures.
That good mood resulted in a reasonably successful five-year auction yesterday afternoon, and the market held onto most of its gains even after the weekly money supply statistics proved disappointing.
The New York Fed reported late in the day that M2 rose $3.2 billion in the week ended Oct. 14, when traders had expected the measure to decline.
Traders said the market performed well yesterday. "There's just been an underlying grinding bid all days," a government note trader said.
In addition to the favorable indicators, a bond trader said the market has been heartened by reversal of the recent trend of heavy selling of Treasury Strips by Japanese investors.
Strips had gotten so cheap that domestic investors starting buying them Wednesday, which "put a good bid in that stuff," the trader said. "But once the market's up enough, I think the Japanese sellers will come out again."
He added that considerable selling will probably emerge in the cash market once the 30-year approaches 8%.
The trader predicted the long bond will trade between 8% and 8 1/8% as the market waits for next Friday's October employment report.
Brian Fabbri, chief economist at Midland Montagu, said the long bond will be "caught between significant conflicting influences," since to talk of a tax cut is not going to go away, but economic statistics are likely to continue to be weak.
JAMES S. ABRAMS JR.
James S. Abrams Jr., executive vice president at Allen & Co., died at his home in South Salem, N.Y., on Wednesday, following a long illness. He was 81.
Mr. Abrams became head of the municipal bond department at Allen in 1939, and was considered an innovative problem solver for difficult municipal financings, including the $100 million Mackinac Bridge Authority and the $180 million Massachusetts Turnpike Authority (Boston Extension).
He began his career on Wall Street with Webster, Kennedy & Co. in 1932 and moved to R.K. Webster & Co. in 1936, where he remained until joining Allen in 1939.
Mr. Abrams is survived by his wife, Marguerite, and two sons. Funeral arrangements are not yet finalized.
The Treasury's $9 billion of five-year notes were auctioned at an average yield of 6.92% and will bear a 6 7/8% coupon, down from the 7.05% average and 7% coupon at last month's five-year auction.
Some notes were awarded at 6.93%, and when dealers saw that they had won more notes than they expected, the market dipped, but only briefly.
The auction results showed demand for issue was weak, as was the case at Wednesday's two-year sale.
Treasury Market Yields
Thursday Week Month
3-Month Bill 5.11 5.20 5.27
6-Month Bill 5.24 5.32 5.37
1-Year Bill 5.31 5.40 5.45
2-Year Note 5.93 5.95 6.04
3-Year Note 6.19 6.22 6.28
4-Year Note 6.34 6.34 6.50
5-Year Note 6.91 6.92 7.00
7-Year Note 7.32 7.26 7.34
10-Year Note 7.63 7.56 7.54
15-Year Bond 7.83 7.86 7.78
30-Year Bond 8.02 8.02 7.88
Source: Cantor, Fitzgerald/Telerate
Bids at the auction were only 2.6 times the size of the issue; the government usually gets bids totaling more than three times the size of the issue at five-year sales. And there were only $432 million of noncompetitive bids, when the average in recent years has been $636 million.
Traders were surprised yesterday morning when September durable goods orders fell 3.2%, to $121.5 billion, when economists had been expecting only a small decrease. And the Labor Department reported that new claims for unemployment insurance rose 29,000, to 452,000, in the week ended Oct. 12, which was also a bigger increase than the market expected.
Analysts said the claims figure was the more worrisome of the two numbers. Even though September durable goods looked weak, much of the decline came in the transportation sector, which is traditionally volatile.
September durables orders "are not as weak as they appear on the surface," said Matthew Alexy, a money market economist at Deutsche Bank.
Excluding transportation orders, which fell 13.9%, September durable orders rose 0.9%, he said. And some areas posted big gains, including electrical machinery, which rose 8.6%, and non-electrical machinery, which was up 4.6%, Mr. Alexy said.
On the other hand, the increase in jobless claims was troubling.
The four-week moving average now stands at 435,000, up from 414,000 in August and 407,000 in July, and Mr. Alexy pointed out that the number of people receiving benefits is also starting to trend higher.
"If we're really coming out of a recession, claims would be heading much lower," he said. "The fact that claims are increasing is quite significant."
Late in the day, prices came off their highs when the M2 meaures posted an increase, instead of fallings as economists had expected.
A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply fell $3 billion to $873 billion in the week ended Oct. 14; the broader M2 aggregate gained $3.2 billion, to $3.4 trillion; and M3 increased $2.7 billion, to $4.1 trillion, in the same period.
The December bond future contract closed 9/16 higher at 98 12/32.
In the cash market, the 30-year 8 1/8% bond was 9/16 higher,at 100 31/32-101 3/32, to yield 8.02%.
The 7 7/8% 10-year note rose 7/32, to 101 16/32-101 20/32, to yield 7.63%.
The three-year 6 7/8% note was up 3/32, at 101 21/32-101 23/32, to yield 6.19%.
In when-issued trading, the 6 5/8 two-year note was up 1/8, at 100 3/32-100 4/32, to yield 5.93%. The two-year was auctioned Wednesday at a 6.015 average.
Rates on Treasury bills were lower, with the three-month bill down seven basis points at 4.99%, the six-month bill off six basis points at 5.05%, and the year bill seven basis points lower at 5.05%.
Also, for the week ending Wednesday, the federal funds rate averaged 5.24%, down from 5.28% from the previous weeks, according to the New York Fed.
Solly's Illegal Earnings
Salomon Brothers Inc. said yesterday it earned between $3.3 million and $4.6 million from the illegal bids it entered at eight Treasury auctions.
The estimate was contained in a report the firm submitted yesterday to federal authorities.
The estimated profits include a gain of $16.7 million to $18.4 million at the two-year auction in May, Salomon said.
Salomon said excluding the auction of the May 1993 two-year notes, it posted results ranging from a $5.6 million loss to a $2.3 million gain at the seven other auctions at which it submitted illegal bids.
The firm presented evidence that crime may not pay. It examined the results of 11 other auctions since January 1990 at which it had a position of more than $1 billion, and said the average profit at those 11 auctions was higher than the average profit at seven auctions at which it submitted illegal bids.