The Treasury long bond flirted with 8% yesterday as prices fell sharply for the second day in a row.
By late in the afternoon, the 30-year bond was 1/2 point lower to yield 7.95%, after having traded as high as 7.98%/
Traders and analysts are still describing the sell-off as a correction in a bull market and said they expect prices will eventually bounce back.
"We're looking at a market that's had one tremendous run since July and it's just stopping to get its equilibrium," a government note trader said.
But he acknowledged that the market is vulnerable to further losses.
A lot of technical indicators are starting to turn negative, the trader said, and if this morning's indicators are unfavorable, "we'll definitely get a lot of selling."
Selling was part of the problem yesterday. There were reports that $1 billion of 10-year notes hit the street during the morning and rumors that Japanese investors' sales of stripped Treasuries continued to put pressure on the market.
Economists surveyed by The Bond Buyer expect this morning's retail sales report to show a ).5% increase overall and a 0.2% gain excluding autos. The September producer price index isndex is expected to gain 0.2%, with a 0.3% rise in the core rate.
Even if the numbers are good today, the upside may be limited since many participants will be poised to take profits and since it seems likely the Japanese will continue to sell U.S. Treasury Strips.
"It's a very fundamental and ugly issue," the note trader said. "One of our long-term customers is a seller and that's not good for bond prices."
There are reports that the Japanese Ministry of Finance may change the rules about marking Strips to market; it was the advantage of not having to mark the secuities to market that set off the heavy Japanese buying off the securities in February and March.
Philip Braverman, chief economist at DKB Securities, said the widespread belief in Japan that the dollar would move lower against the yen was another incentive for Japanese accounts to get rid of Treasury Strips.
The note trader pointed out that the selling comes at an inopportune time for the Street. Since most domestic investors are already long, dealers are having a hard time finding new homes for the bonds that they get by gluing the zero-coupon securities back together.
Bill prices dipped yesterday morning after the Fed drained reserves with overnight matched sales for the second day in a row. Analysts said the Fed's interventions to drain reserves were a clear signal to the market that the funds target remains at 5 1/4%, despite the soft funds rate that has prevailed this week.
But the Fed's signals did not alter the widespread belief that the Fed will ease monetary policy again soon. Some think the Fed might move as soon as today, if the indicators allow, while others think the meeting this weekend of the finance ministers from the Group of Seven industrialized nations gives the central bank reason for holding off until next week.
The market ignored some good economic news as it headed lower yesterday, including a bigger-than-expected increase in jobless claims and lackluster chain store sales.
The Labor Department reported that new claims for unemployment insurance rose 5,000, to 435,000, in the week ended Sept. 28, when economists had expected a decline of 10,000 to 15,000.
Kevin Flanagan, a money market economist at Dean Witter Reynolds, said the sell-off yesterday might show the market was worrying about the numbers coming out today and next week.
Mr. Flanagan said upcoming indicators may "counter the notion that the economy is still struggling and inflation is improving."
"We could get producer and consumer price reports indicating that inflation is remaining stubborn at levels of 4 1/2% to 5% on the core rate," he said, adding that he expecting this morning's September retail sales number to show an increase of about 1%.
"The numbers we're getting will not be friendly and may send prices down further," Mr. Flanagan said.
The December bond future contract closed 13/32 lower at 98 20/32.
In the cash market, the 30-year 8 1/8% bond was 17/32 lower, at 101 25/32-101 29/32, to yield 7.95%.
The 7 7/8% 10-year note fell 7/16, to 102 1/32-102 5/32, to yield 7.55%.
The three-year 6 7/8% note was down 1/8, at 101 19/32-101 21/32, to yield 6.22%.
In when-issued trading, the 7 1/8% seven-year note was 7/32 lower, at 99 1/32-99 5/32, to yield 7.28%, up from the 7.20% average at Wednesday's auction.
Rates on Treasury bills were mixed, with the three-month bill up one basis point at 5.02%, the six-month bill steady at 5.06%, and the year bill two basis points higher at 5.10%.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the bank's weekly press briefing that the M1 measure of money supply rose $4.6 billion to $875.4 billion in the week ended Sept. 30; the broader M2 aggregate fell $3.6 billion, to $3.4 trillion; and M3 declined $3.8 billion, to $4.1 trillion, in the same period.
Also, for the week ending Wednesday, the federal funds rate averaged 5.19%, down from 5.33% the previous week according to the New York Fed.