Treasury prices posted modest gains for the third session in a row yesterday as the market shook off some of its worries about runaway economic growth and aggressive fiscal stimulus packages.
Late yesterday, the 30-year bond was up more than 1/8 point and yielded 7.43%, while note prices were 1/8 to 3/8 point higher.
Treasury prices were battered in October and November as participants worried about what Bill Clinton would do if he were elected and whether the economy was picking up.
But by last week, the body of evidence seemed to suggest that the economy was growing enough to deflect any big stimulus measures by the Clinton administration, but not so much that it would set off inflationary pressures. The perception of non-threatening economic growth, which was reinforced by Friday's modest 105,000 increase in November nonfarm payrolls, has allowed Treasury prices to improve.
"Since last Friday, there has been a detectable change for the better in market sentiment," said Anthony Karydakis, a senior financial economist at the First National Bank of Chicago. "People have realized the market was way overdone on the downside, and there is a correction under way."
Short-term and intermediate securities outpaced the long end yesterday. Traders said big investors reportedly were moving in and out of yield-curve trades. They said there was also talk that good demand for mortgage-backed securities had allowed mortgage dealers to lift hedges by buying five-, seven-, and 10-year Treasury notes.
Karydakis said it was natural that the short end had bounced back more because it had suffered the most damage when the market sold off.
"The front end had been the hardest hit part of the curve in the last month and a half," he said. "Now it seems to be coming back to its senses and seems to be taking out a couple of Fed tightening that had been priced in."
Prices had an upward bent all day, but the move higher picked up momentum in mid-afternoon on a report of weak retail sales in early December.
"We've been trending higher throughout the day, and we took off after the Johnson Redbook," a government note trader said.
The Johnson Redbook reportedly showed department store sales fell 2.2% during the first week in December, compared with the same period in November.
"That was weak, particularly against the very optimistic expectations that have built up regarding the Christmas shopping period," Karydakis said. "The hard numbers don't seem to be consistent with anecdotal evidence saying things will be great."
But the note trader said the report was not as bad as it looked on the surface, since it also showed sales for in early December were up 6.9% from last December.
Traders said the most striking feature of yesterday's bond market was the lack of trading, which has led to increased volatility.
A government coupon trader said he does not expect trading to pick up until January, aside from a little activity related to the two-and five-year auctions later this month.
"A lot of people are thinking there's no sense taking a shot, they're all just doing what they need to do," the trader said.
Bond market participants say that if the economy is growing only slowly and inflation is well under control, long-term Treasury yields look like a deal.
"I think the bond market is fairly cheap right now," Jeff Tyler, a senior portfolio manager at Benham Management Corp., said at a mutual fund conference yesterday. "The backup [in rates] was unnecessary, given that we have a fairly sluggish economy at best."
Tyler expects long-term rates to move lower, with the 30-year heading toward 7% and recommends that investors continue to extend the maturity of their holdings.
He cautioned, though, that the market is likely to remain volatile in the months ahead as the Clinton administration begins to reveal the details of its proposals.
The only news today is the Federal Reserve's "beige book," due out at noon, eastern standard time which compiles reports from the Fed district banks on their local economies.
The March bond futures contract closed 7/32 higher, at 104 6/32.
In the cash market, the 7 5/8% 30-year bond was 6/32 higher, at 102 6/32-102 10/32, to yield 7.43%.
The 6 3/8% 10-year note rose 3/8, to 97 15/32-97 19/32, to yield 6.71%.
The three-year 5 1/8% note was up 6/32, at 100 1/32-100 3/32, to yield 5.08%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.26%, the six-month bill off four basis points at 3.33%, and the year bill six basis points lower at 3.49%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.31 3.40 3.12
6-Month Bill 3.41 3.60 3.36
1-Year Bill 3.60 3.84 3.55
2-Year Note 4.54 4.82 4.45
3-Year Note 5.08 5.36 5.06
5-Year Note 5.97 6.24 5.96
7-Year Note 6.34 6.59 6.44
10-Year Note 6.71 6.92 6.86
30-Year Bond 7.43 7.56 7.66
Source: Cantor, Fitzgerald/Telerate