Continued market uneasiness about the prospect of a Bill Clinton presidency drove prices down yesterday across the curve.
Bills and notes suffered more than the bond, which finished the day off 18/32 point, to yield 7.57%.
Worry about the outcome of the election, which one New York bond trader dubbed "the Clinton Willies," has been dampening otherwise positive market trends in recent weeks.
"People continue to be concerned about reports the Clinton may propose a plan that would try to jump-start the economy early next year," said Fred Leiner, a market strategist at Continental Bank in Chicago. "As we get closer to the election and he continues to hold a large lead, people pay a lot closer attention to what he has to say."
Clinton yesterday stressed that he sees the need for spending cuts in addition to increased investment in public infrastructure.
Last week, the Los Angeles Times reported Clinton's advisers may recommend boosting their fiscal stimulus and infrastructure spending program if the economy does not show more signs of recovery by the time he takes office in January, assuming he is elected.
Supply concerns are also a factor in the market's recent deterioration, Leiner said, Later this week the Fed plans to announce the size of next week's two-year and five-year note auctions, as well as Monday's three-month and six-month bill auctions.
The bond's move past the 7.50% level also sparked some technical selling, market sources said.
Bills and notes were hit harder than the bond yesterday, which market sources said reflects continued frustration that the Federal Reserve has not cut short-term interest rates in response to the ongoing economic malaise. In addition, the price erosion came after hoped-for rate cuts failed to materialize overseas, market sources said.
Over the weekend, Fed Governor John LaWare questioned whether further cuts in the fed fund's rate would help stimulate a recovery. he also suggested that rate cuts could push interest rates on the long end higher, which would be counter-productive to a recovery.
Leiner said the indicators set for release between now and the election are unlikely to have any long-term implications for the market and will probably only result in short-lived bounces up or down.
Today's release of the housing starts number for September is expected to show a drop to 1.20 million units, down from 1.24 million registered in August, according to a survey of 10 economists by The Bond Buyer.
The indicator will for the first time include a broader definition of housing starts that counts homes rebuilt on top of existing foundations. The switch means houses rebuilt after being destroyed by natural disasters or fires are now included in the total.
The bond opened nearly 3/4 point lower at the start of yesterday's New York session, but recovered a portion of the losses late in the day on what some market sources said was a result of short covering.
Other traders said some of the improved tone could be attributed to wire service reports about next month's issue of Penthouse magazine, which will raise new allegations about Clinton's alleged affair with Gennifer Flowers.
The interview with Flowers, who makes the charges, is set for release later this week, a spokeswoman for the magazine said.
The December bond futures contract closed 14/32 lower, at 10 38/32.
In the cash market, the 7 1/4% 30-year bond was 18/32 lower, at 96 2/32-96 6/32, to yield 7.57%.
The 6 3/8% 10-year note fell 3/4, to 97 21/32-97 25/32, to yield 6.68%.
The three-year 4 5/8% note was down 13/32, at 99 29/32-99 31/32, to yield 4.63%.
Rates on Treasury bills were higher, with the three-month bill up seven basis points, at 3.02%, the six-month bill also seven basis points higher at 3.11%, and the year bill 10 basis points higher, at 3.40%.
Treasury Market Yields
Monday Week Month
3-Month Bill 3.02 na 2.96
6-Month Bill 3.18 na 3.00
1-Year Bill 3.40 na 3.14
2-Year Note 4.11 3.96 3.87
3-Year Note 4.63 4.39 4.38
5-Year Note 5.68 5.48 5.43
7-Year Note 6.24 6.06 5.95
10-Year Note 6.68 6.48 6.40
30-Year Bond 7.57 7.51 7.34
Source: Cantor, Fitzgerald/Telerate