Treasury prices slipped abruptly yesterday morning, then traded quietly near the day's lows for the rest of the session as participants waited for today's indicators.
Late in the afternoon, the 30-year bond was off 1/2 point to yield 7.67%.
Traders blamed the price declines overnight and in early New York trading on speculation about a German rate increase.
On Thursday, the Bundesbank will hold its last meeting before its summer break. There was talk in the bond market yesterday that German policymakers may announce a rate increase after that meeting in response to the gains in German money supply.
"There's been a lot of speculation about [the Bundesbank] increasing the discount rate again," said Chris Iggo, an international economist at Chase Securities in London. "I think people don't want to have big investments either way ahead of that."
The German discount rate is currently at 6%.
A government bond trader said the market was right to worry about the competitive position of U.S. Treasury securities. "We're the only ones in the western world with rates dropping like a stone," he said.
Some traders said the start of the Democratic Convention was another negative factor yesterday because it reminded the bond market of the uncertainty about the outcome of the presidential race.
After that initial sell-off, yesterday's activity was dull, and traders said participants were waiting to see today's indicators: the June consumer price and retail sales reports and early-July car sales figures.
The retail sales report is the key number today. Consumer spending has slowed in recent months after posting a big increase in the first quarter, and economists say it needs to grow again to keep the recovery on track.
Economists surveyed by the Bond Buyer on average expect a 0.5 increase in June retail sales and a 0.3% gain in sales excluding automobiles. In May, total sales rose only 0.1% and sales excluding autos were up 0.2%.
Mark Green, an economist at Wells Fargo Bank, said a 0.5% increase in total retail sales was "nothing to get excited about."
That kind of increase would "suggest consumer spending is picking up a little bit," Mr. Green said, but added that, "given the uncertainty about the economy right now, I think the chances are consumer spending will get weaker instead of stronger in the months ahead."
The June consumer price index is expected to echo the moderation seen in Friday's June producer price report.
Analysts expect a 0.3% gain in the June consumer price index and also in the rate excluding food and energy prices.
Also today, the car sales statistics for the first 10 days of July are expected to fall to a 6.7 million annual rate from the 7.5 million pace posted in late June.
Treasury Market Yields
Monday Week Month
3-Month Bill 3.27 3.28 3.71
6-Month Bill 3.34 3.39 3.86
1-Year Bill 3.58 3.66 4.11
2-Year Note 4.34 4.43 5.00
3-Year Note 4.87 4.95 5.52
5-Year Note 5.93 5.95 6.45
7-Year Note 6.46 6.43 6.87
10-Year Note 6.96 6.88 7.27
15-Year Bond 7.32 7.25 7.55
30-Year Bond 7.67 7.61 7.84
Source: Cantor, Fitzgerald/Telerate
Mr Green questioned how much impact this week's numbers would have on the bond market.
"I don't think we'll get a lot of new information this week," he said. "Obviously we're getting a lot of information, but I don't think it will tell us much people don't already know, unless there are surprises."
Traders agreed the market's tone was heavy yesterday, but most are still optimistic and regard the declines as a correction.
A note trader said the direction prices take this week depends on whether retail investors by more of the corporate bonds that were sold last week.
If they do, corporate dealers will be able to take off hedges in the Treasury market and Treasury prices will rise, he said. If not, Treasuries are likely to decline a little, given the additional corporate supply due in coming weeks.
Some technically minded traders said the recent price action was sending ominous signals.
Mike Strauss, a technical analyst at Lehman Brothers, said the sell-off Friday and yesterday was disconcertingly reminiscent of the price action in January when the market began to descend from the highest prices seen this year. In early January, the 30-year bond traded as low as 7.39%.
The bond market recently "reached an overbought extreme in terms of price momentum and psychology," as was the case in January, Mr. Strauss said. "That's going to have to reverse itself."
The recent price losses may just represent a small correction, he said.
But Mr. Strauss said if Treasury prices do not manage to close above Friday's lows today, the market may head to lower levels.
For example, Friday's low on the 30-year bond was 104 7/32. If the long bond does not top that today, the market may head to lower prices, pushing the long bond's yield back toward 7.75%, Mr. Strauss said.
The September bond futures contract closed 3/8 lower at 102.
In the cash market, the 30-year 8% bond was 9/16 lower, at 103 20/32-103 24/32, to yield 7.67%.
The 7 1/2% 10-year note fell 13/32, to 103 20/32-103 24/32, to yield 6.96%.
The three-year 5 7/8% note was down 3/32, at 102 18/32-102 20/32, to yield 4.87%.
In when-issued trading, the 6 3/8% seven-year note was 1/4 lower, at 99 12/32-99 16/32, to yield 6.46%.
Rates on Treasury bills were mixed, with the three-month bill one basis point lower at 3.22%, the six-month bill off one basis point at 3.27%, and the year bill two basis points higher at 3.47%.