Prices Decline on Profit Taking As Dealers Prepare for Jobs Data
Treasury prices slid lower yesterday as dealers sold securities in order to take profits ahead of tomorrow's September employment report.
Late in the day, the 30-year bond was down 3/8 point and yielded 7.82%.
"It's natural, with the nice run-up we've had, that we would have some profit taking," a bond futures contract trader said.
Traders said the unexpected surge in August home sales reported yesterday morning gave participants a reason to unload some securities.
That unfriendly home sales number was partly offset, though, by a report that reinforced hopes for a near-term Fed easing, they said.
The futures trader said even though the bond market is still in a "positive mode," he expects to see further selling pressure today. He predicted the December futures contract, which closed at 99 28/32 yesterday, will test support today at 99 23/32, the low so far this week, and could get as low as the next support level at 99 14/32.
A government bond trader agreed that the market will come under downward pressure again today, but said the losses will be muted because dealers' positions are "reasonably modest" and retail investors are not selling.
Treasury prices began to decline in overseas trading and fell further after the August new home sales report came in much stronger than expected.
Sales of new homes jumped 6.7% in August, when economists had expected only a modest increase. And in another sign of strength, most of July's downward move was revised away. July's change now stands as a 2.7% decline instead of the 8.5% plunge reported last month.
Analysts said the August sales pace, which came to an annual rate of 540,000 homes, the highest since July 1990, was good news for the economy.
"It's a pretty healthy sign," said David Wyss, chief financial economist at DRI/McGraw-Hill. "It suggests people are out buying homes, that they're not as scared as we thought they were."
And the reduction in the backlog of unsold homes, which fell to 6.6 months from 7.1 months, is a favorable omen for the construction industry, Mr. Wyss said.
Bob Dieli, a business economist at Northern Trust Co., said the surge in home sales was really not that surprising, since "conditions were essentially favorable for the real estate market for most of the summer.
"Mortgage rates have been a major part of it, but we've also heard from people in the real estate business that listing prices, in their words, have been more realistic," Mr. Dieli said.
While home sales were a negative, a release from Washington consultants Johnson Smick International helped support the Treasury market, traders said.
Johnson Smick, which distributes its releases only to clients, reportedly said Fed policymakers are likely to ease again, with Federal Reserve Chairman Alan Greenspan more cautious about easing than some of his colleagues.
The Johnson Smick report also said one regional Fed bank's economic model showed the funds rate would have to go to 4.5% in order to get M2 to the middle of the Fed's target range.
The Fed currently is targeting funds at 5 1/4%, but traders hope the Fed will lower its target to 5% if tomorrow's jobs report shows only modest gains in September payrolls.
Traders said the Johnson Smick report was good news because it confirmed that the Fed is leaning toward another easing.
But Henry Engler, an economist at Chemical Securities, said Johnson Smick did not seem to be saying anything different than most other Wall Street analysts.
"Overall, the view that they're likely to ease further and the most likely scenario being a 1/4-point reduction in the funds rate is very much in line with the thinking of most analysts," Mr. Engler said.
Also yesterday, the Treasury announced it will sell $9.25 billion of seven-year notes next Wednesday, up from the $9 billion sold at the last auction in July.
Late yesterday, the seven-year notes were bid at 7.27% in when-issued trading.
The December bond future contract closed 5/32 lower at 99 28/32.
In the cash market, the 30-year 8 1/8% bond was 11/32 lower, at 103 10/32-103 14/32, to yield 7.82%.
The 7 7/8% 10-year note fell 9/32, to 102 22/32-102 26/32, to yield 7.46%.
The three-year 6 7/8% note was down 3/32, at 101 19/32-101 21/32, to yield 6.23%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 5.09%, the six-month bill up two basis points at 5.15%, and the year bill one basis point higher at 5.13%.
Salomon Probe Complete
Salomon Brothers said yesterday it had completed its internal investigation of the firm's bidding at Treasury auctions and found one more possible instance of an unauthorized bid for a customer.
Salomon had already identified unauthorized customer bids in seven auctions.
Salomon said it did not find any unauthorized bids in the first six months of 1990. In the course of its investigation, Salomon examined nearly a thousand auction bids it submitted for itself and its customers in 68 Treasury note and bond auctions from January 1990 through August 1991.