Treasury prices ended with small gains yesterday after recovering from an early setback on the surprisingly strong housing starts report.
Late in the day, the 30-year bond was up 1/4 point on the day and 1/2 above the session lows, to yield 7.89%.
The jump in the housing starts number was the first positive economic news the market has gotten in a while.
October housing starts rose 7.3% to an annual rate of 1.096 million, the highest level since last November. The market expected a 1% decline in starts.
Last month's permits also were strong, rising 5.4% after posting a 2.9% increase in September.
The October gain was "across the board in terms of region, and it was across the board in terms of single family and multifamily," said Peter D'Antonio, an economist at Citibank.
But he said since the gain had occurred from a low level, starts were "still pretty weak."
Robert Dederick, chief economist at the Northern Trust Co. in Chicago, said the improvement in housing starts was notable in that it suggests the economy is getting a boost from the Federal Reserve's repeated easings in monetary policy.
"Lower interest rates are having a beneficial impact on long-lived type spending," he said.
Mr. Dederick said, however, that the improvement in starts was inconsistent with weak sales figures and reports from builders that traffic had been slow. "I'll feel better if I see a pickup in sales."
Even if the housing sector continues to improve, it may not be enough to carry the economy since construction activity tapers off during the winter months, he said. "But it has to be taken as a positive signal that people are willing to make commitments at the right prices."
Prices fell after the housing report came out, traded in a narrow range through much of the session, then perked up in mid-afternoon when some participants began buying securities to cover short positions.
"Guys got a little too short, the Board [of Trade] didn't go down anymore, so thet started grabbing things," a government note trader said.
Traders said anticipation of a favorable jobless claims number today and some purchases related to a municipal bond deal also contributed to the late-day gains.
Treasury traders kept an eye on the stock market, but its price moves were sedate compared to the sell-offs on Friday and Tuesday.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 4.59 4.76 5.16
6-Month Bill 4.71 4.86 5.30
1-Year Bill 4.81 4.97 5.39
2-Year Note 5.48 5.62 5.98
3-Year Note 5.82 5.97 6.24
4-Year Note 5.92 6.07 6.37
5-Year Note 6.52 6.66 6.96
7-Year Note 6.96 7.06 7.35
10-Year Note 7.35 7.40 7.66
15-Year Bond 7.70 7.69 7.88
30-Year Bond 7.89 7.86 8.07
Source: Cantor, Fitzgerald/Telerate
Traders said the long bond is floating in a world of its own. "The bond is detached from the west of the market in a serious way," a bond trader said.
Short-term securities are supported by expectations that the weak economy will force the Fed to ease again.
But the long end is suspicious that any solution to the economy's problems will end up hurting bonds. Traders are worried that repeated easings will reignite inflation and are concerned about how congressional proposals for growth programs will be worked out.
"Anything on the stimulus side takes the budget deficit into scary territory," a coupon trader said.
The short end also got the an of next week's two-and five-year sales yesterday.
Analysts expected a reduction in the two-year, but the market showed little reaction when the Treasury said it would keep the issue size steady at $13.5 billion. The five-year size also was unchanged at $9 billion.
The two sales combined will raise $11.2 billion of new cash.
Because the market will be closed Thursday for Thanksgiving, the two-years is being sold Monday, instead of Tuesday, and the fives will be auctioned Tuesday.
The only numbers today are the weekly jobless claims and money supply releases. Economists expect new claims to fall to 446,000 from the 454,000 reported last week.
The December bond future contract close 5/32 lower at 100.
In the cash market, the 30-year 8% bond was 1/4 higher, at 101 2/32-101 6/32, to yeild 7.89%.
The 7 1/2% 10-ywar note rose 1/32, to 100 28/32-101, to yield 7.35%.
The three-year 6% note was up 1/32, at 100 13/32-100 15/32, to yield 5.82%.
In when-issued trading, the two-year notes were bid at 5.51% and the five-year notes stood at 6.55%.
Rates on Treasury bills were lower, with the three-month bill down five basis points at 4.49%, the six-month off two basis points at 4.55%, and the year bill one basis point lower at 4.59%.
Automated Sales on the Way
The Treasury's system for auctioning its debt will enter the electronic age sometime next year, a Public Securities Association official said this week.
When the Salomon scandal brought Treasury debt auctions into the limelight last summer, many were surprised to find the system still at the horse and buggy stage: Securities firms send messengers to the Fed to place bids in a box in the lobby.
Lee Olesky, the PSA's assistant general counsel, said the Treasury and the Federal Reserve are developing a two-tier electronic bid submission system.
The two software packages, Standard FedLine and FaST FedLine, operate on dealers' own hardware and allow firms to submit competitive and noncompetitive tenders.
Standard FedLine, designed for depository institutions and small dealers, will be available early next year.
FaST FedLine, aimed at larger firms that bid aggressively, will not be available until the fourth quarter of next year.
The FaST system can fit more bids on a screen, requires fewer keystrokes, and automatically transmits the tenders to the Fed.
Mr. Olesky said he does not expect the real switch to automation to occur until the FaST system is ready to go.
Even after both systems are available, firms can still use the traditional method of entering bids. "The Treasury and Fed have said they'll leave the Fed lobby open until they find there's no longer a need for it," Mr. Olesky said.