Most Treasury note and bond prices closed with small losses yesterday as participants shifted their focus from Europe's ups and downs to this week's ample supply of new government securities.
Late yesterday, the 30-year bond was off 1/4 point to yield 7.34%, and short-term notes were down 1/8 to 1/4 point.
The price declines occurred early in the session as traders who had bought securities in hopes of a flight-to-quality reaction to Sunday's French vote on European unity liquidated those positions.
The French approved the Maastricht treaty, which calls for a single European currency, by a slim 51% majority. The vote allows Europe to proceed on the road to greater unity, but many observers now see a two-speed system evolving, with Germany, the Benelux countries, and France closely aligned and the rest of Europe lagging.
In fact, Great Britain, which let the pound float last week, said it will not rejoin the European Rate Mechanism immediately, and there were reports that Italy also wait before putting the lira back into the mechanism.
The European markets were relatively quiet in the wake of the referendum although both the pound and the dollar weakened.
"If you look at the front end, it's clear people took long positions home with them [Friday] hoping for a no vote" in France, said Peter Mayers, assistant treasurer at Bank Julius Baer in New York.
The participants holding long positions thought that if the referendum failed to pass, the European markets would be roiled and investors would seek haven in the Treasury market. When the yes vote and the markets' restrained response disappointed those hopes, the traders with long positions sold securities, which pushed prices lower, he said.
Steve Ricchiuto, chief economist at Barclays de Zoete Wedd Securities, said he thought the market's move lower also reflected domestic concerns.
At the front end, traders have finally given up hope of getting a near-term cut in the Fed's discount rate, something that the market has been hoping for since the weak August payrolls were reported earlier this month, Mr. Ricchiuto said.
The short end's reaction was also exacerbated by the imminent arrival of supply, with the Treasury due to sell $14.5 billion of two-year notes today and $10.5 billion of five-years notes tomorrow.
At the long end, trader were disappointed that this weekend's Barron's had nothing to say about Democratic presidential candidate Bill Clinton's plans for debt issuance, Mr. Ricchiuto said. Late Friday, long-term prices rallied on rumors that Mr. Clinton would issue fewer bonds and more short-term securities if elected, and some of the reports said the matter would be addressed in Barron's.
After the initial sell-off yesterday morning, trading was deadly dull.
A coupon trader said there had been so little retail activity that he found it hard to assess how much interest there will be in the note auctions.
A note trader thought yesterday's lack of retail a bad omen for the auctions.
"The market trades weak to terrible," he said, and predicted the two-year notes would be back around 4% by the times dealers must bid on today's auction. The when-issued two-year note was offered at 3.93% late yesterday.
Stephen Gallagher, an economist at Kidder, Peabody & Co., said there was a "prevailing lack of interest" in the Treasury market.
But he expected the two-year auction to go fairly well, even though today's sale is the first to use the single-price bidding method. In a single-price auction, also known as a dutch auction, all securities are awarded at the highest yield accepted at the auction.
Still, Mr. Gallagher said, "Two-years are not all that difficult to sell, especially with a lot of belief still out there that the Fed will ease in early October." Many economists think the Federal Reserve will ease monetary policy again if the September employment report, due out on Oct. 2, shows another big decline in payrolls.
"The five-year [auction] could be a little more difficult," Mr. Gallagher said. "Maybe that's why it's sold off a little more since last week."
The December bond features contract closed 14/32 lower at 105 10/32.
In the cash market, the 7 1/4% 30-year bond was 9/32 lower, at 98 22/32-98 26/32, to yield 7.34%.
The 6 3/8% 10-year note rose 1/32, to 99 21/32-99 25/32, to yield 6.40%.
The three-year 4 5/8% note was off 5/32, at 100 19/32-100 21/32, to yield 4.38%.
In when-issued trading, the five-year note to be sold tomorrow was offered at 5.46%.
Rates on Treasury bills were higher, with the three-month bill up for basis points at 2.92%, the six-month bill up three basis points at 2.94%, and the year bill four basis points higher at 3.05%.
First Boston Goes Electric
First Boston Corp., one of the biggest primary dealers in U.S. government securities, yesterday launched a system that allows customers to execute trades electronically with its Treasury desk.
The new system, GovTrade, is available over Bloomberg System and Knight Ridder terminals. Investors can use the system to buy or sell Treasury notes and bonds in amounts ranging from $25,000 to $100 million, the firm said. It plans to add Treasury bills by the end of the year and zero coupon and agency securities early next year.
"This is an on-line, tradeable market," said John P. Costas, head of U.S. government securities trading at First Boston.
Mr. Costas said GovTrade started off yesterday with more than 100 customers. He hopes to increase the number of customers to "several hundred" in the near future and expects that GovTrade eventually could account for as much as a quarter of First Boston's Treasury trading.
Yesterday, GovTrade transactions made up 4% to 5% of First Boston's trading flow, he said.
Some Treasury traders yesterday questioned whether GovTrade's prices would be attractive enough to bring in business.
"Customers are so sophisticated right now, they don't leave anything on the table," a coupon trader said.
Mr. Costas said he expects GovTrade's prices to be "very competitive," but said the proof will be in the system's trading volume.
"So far, trading volume would indicate they are," he added.
For the last year and a half, Daiwa Securities America has offered its customers an electronic trading system.
Treasury Market Yields
Monday Week Month
3-Month Bill 2.96 2.94 3.19
6-Month Bill 3.00 2.97 3.33
1-Year Bill 3.14 3.09 3.56
2-Year Note 3.87 3.76 4.21
3-Year Note 4.38 4.26 4.79
5-Year Note 5.43 5.24 5.70
7-Year Note 5.95 5.80 6.23
10-Year Note 6.40 6.30 6.68
30-Year Bond 7.34 7.25 7.44
Source: Cantor, Fitzgerald/Telerate