Treasury prices, which have been battered recently by political uncertainty and supply fears, will remain under siege this week as the government tries to sell short-term notes to the skittish market.
On Friday, the 30-year bond closed 3/8 point lower on the day, and down 1 1/4 points on the week, and yielded 7.64%.
Traders said the market's main problems are the same ones that have dogged it for weeks now: Dealers must bid on a huge quantity of new paper over the next month and they are worried the supply of Treasury securities will balloon in the future if Democratic presidential candidate Bill Clinton is elected and tries to stimulate the economy with spending increases.
Friday's initial push lower occurred when a block of mortgage-backed securities hit the Street in the morning and dealers hedged by selling intermediate Treasuries.
Traders said some unfriendly economic news was another factor in the price declines, including the big increases in all three measures of the money supply released Thursday night and Friday's stronger-than-expected car sales.
Mid-October car sales increased to a 6.4 million rate from the 5.8 million pace in the beginning of the month, when economists had forecast only a 6.1 million sales pace.
John Lonski, senior economist at Moody's Investors Service, said the 27.1% year-over-year jump in mid-October motor vehicle sales showed consumer spending was healthier than expected. "The bond market may now have to do without the support of an especially weak economy," he said.
Short-term notes suffered the worst losses Friday, reflecting the pressure from the upcoming supply, traders said. The Treasury will sell $15 billion of two-year notes tomorrow and $10.75 billion of five-year notes Wednesday.
A note trader said there was "a tremendous amount of selling in off-the-runs" Friday as dealers set up hedges in preparation for the auctions. "The market's been very, very volatile and I think it just wants to go lower into the supply."
Late Friday, the when-issued two-year notes were bid at 4.42% and the when-issued five-years were bid at 5.94%. But traders expected the issues to sell off more going into the auctions, and predicted the two-years will bear a 4 1/2% coupon and the five-years will bear a 6% coupon.
"The only improvement I can see in the market is in the very, very short maturities," such as Treasury bills, said Peter Mayers, assistant treasurer at Bank Julius Baer. "I hear of more and more people taking defensive positions, putting money in very short maturities."
Mayers said the note auctions would put pressure on short-term notes, while the long end of the curve still faced "political and fiscal worries."
The huge losses and frenzied price action in recent weeks has taken a toll on market psychology, he added.
"People are very quick to sell any upward moves," Mayers said. "When there are only a few ticks of profit in there, people will take it."
Many participants argue that once the election and auctions are out of the way, interest rates will decline again.
Even if Clinton is elected and works to enact fiscal stimulus measures, the legislation would take a long time to pass and then still more time to take effect, they say, and meanwhile the economy would continue to stutter.
But some economists see signs the economy is beginning to pick up steam. The indicators they mention include new jobless claims, which have fallen for the last three weeks, and money supply.
Paul Kasriel, a monetary economist at Northern Trust Co., said there seems to be a small improvement occurring in the money supply. It looks as if M2 will be up for the third month in a row in October and as if real M2 for October, adjusted for inflation, will post an increase for the second month in a row, he said.
"We haven't seen that for a long time and that really is a prerequisite for a pickup in economic activity," he said.
Kasriel cautioned that the improvement in money growth could be derailed if the government closes a lot of banks in December. In any case, the pickup would not show up in economic activity until the first quarter of next year, he added.
Over the long term, he is also worried about the possibility that the negotiations on the General Agreement on Trade and Tariffs could fall apart,
"I'm not so sure we'll put the [GATT] talks back together gain if we get a Clinton administration; I don't think Clinton is as much of a free trader as Bush is," Kasriel said. "So there's an increased likelihood protectionism growing around the world and I don't think that's good for fixed-income securities."
Kasriel said the recent developments make him "cautious" about the Treasury market. He suggested investors "migrate toward the short to intermediate part of curve.
"There are signs the economy is picking up and that's not good for the longer end," Kasriel said.
The December bond futures contract closed 15/32 lower at 102 14/32.
In the cash market, the 7 1/4% 30-year year bond was 3/8 lower, at 95 9/32-95 13/32, to yield 7.64%.
The 6 3/8% 10-year note fell 11/32, to 96 26/32-96 30/32, to yield 6.80%.
The three-year 4 5/8% note was down 7/32, at 99 10/32-99 12/32, to yield 4.86%.
Rates on Treasury bills were higher, with the three-month bill up one basis point at 2.95%, the six-month bill up two basis points at 3.20%. and the year bill four basis points higher at 3.40%.
Board of Trade Action
The Chicago Board of Trade said Friday that it had barred Leo B. Stern & Co., a clearing member of the exchange, after the firm failed to meet a margin call that resulted from unauthorized trades that occurred Thursday.
The trades resulted in dramatic fluctuations in Treasury prices Thursday morning.
According to a Board of Trade statement released Friday, a member authorized to trade only options brought two visitors onto the trading floor Thursday morning. That member and another member, who was authorized to trade all products, initiated the trades, and "the two visitors apparently assisted in the direction of the trading activity," the board said.
The Board of Trade said it was a violation of the exchange's rules for the visitors to direct trades from the floor. Traders said it was also against the exchange's rules for the options-only member to trade futures for a customer.
Leo B. Stern, which was the clearing house for one of the members executing trades, was unable to meet a margin call of "less than 9 million dollars," the board said. As a result, the firm was barred from doing business and three of its members with exchange seats were suspended, the board said. It added that "none of these individuals are the subject of the investigation."
Treasury Market Yields
Friday Week Month
3-Month Bill 2.99 2.95 2.84
6-month Bill 3.27 3.10 2.90
1-Year Bill 3.51 3.29 3.03
2-Year Note 4.32 3.99 3.78
3-Year Note 4.86 4.49 4.23
5-Year Note 5.87 5.52 5.33
7-Year Note 6.39 6.09 5.91
10-Year Note 6.80 6.57 6.40
30-Year Bond 7.63 7.52 7.35
Source: Cantor, Fitzgerald/Telerate