The Treasury market continued its recent pattern of ignoring unfavorable economic news yesterday.
Despite a big jump in May factory orders and a report that consumer confidence picked up in June, the 30-year bond was 1/32 higher to yield 8.42% late yesterday afternoon.
Scott Winningham, chief market analyst at Stone & McCarthy Research Associates, said the price action showed the Treasury market has gotten oversold in recent weeks.
"A lot of the bad news already had been and still is built into the market," Mr. Winningham said. "So there were few people left who wanted to sell."
The approach of Friday's June employment numbers is also keeping a lid on activity, Mr. Winningham said.
He said yesterday's price movement suggests the market has the potential to move higher.
Traders said the only real excitement yesterday occurred at the fron end, where the short squeeze that's been afflicting the two-year area for over a month heated up again.
In late trading, the off-the-run 7% two-year notes actioned in April were 3/16 higher on the day to yield 6.64%, 34 basis points below the yield on the current two-year. One trader called the spread "astronomical."
The two-year issues sold in April and May have been expensive to buy or borrow, reportedly because a few big players cornered the market and have held onto the notes.
Yesterday's surge in the off-the-run notes due in April 1993 apparently was set off when someone decided to cover a short position in the issue.
"It caused a lot of pain on the street," a government trader said. "You've just put some huge losses in dealer hands."
The trader added he did not believe the squeeze was over. "All that's happened is the issue's been repriced" to the detriment of those still short, he said.
The manager of a trading desk said aside from the off-the-run two-years, the front end was for sale yesterday.
The morning indicators worked against the short end, while some participants thought the strong dollar added to the long end's charms, he said.
The dollar got a boost from the strong May factory orders and late yesterday was trading at 1.8348 marks, up from 1.8290 late Monday, and at 138.75 yen, up from 137.40.
The market dipped briefly yesterday morning as reports spread about the University of Michigan's index of consumer sentiment, then recovered, and then dipped again when the Commerce Department reported stronger-than-expected factory orders for May.
The September bond future contract closed unchanged at 93 16/32.
In the cash market, the 30-year 8 1/8% bond was 1/32 higher, at 96 18/32-96 22/32, to yield 8.42%.
The 8% 10-year note fell 1/32, to 98 6/32-98 10/32, to yield 8.25%.
The three-year 7% note was unchanged at 99 2/32-99 4/32, to yield 7.33%.
Rates on Treasury bills were mixed, with the three-month bill down two basis points at 5.57%, the six-month bill up one basis point at 5.72%, and the year bill three basis points higher at 6.02%.
Yesterday's news started with reports that the University of Michigan's survey of consumer sentiment showed confidence had risen to 82.1% in June from 78.3% in May. The survey's measure of current sentiment reportedly rose to 91.9% in June from 89% in May and future expectations were up to 75% from 71.5%.
The Michigan survey is one component of the index of leading indicators and the June report will not be released publicly until late this month. But some Wall Street firms pay the university for early reports on the index and that news apparently leaked.
Richard Curtin, director of consumer surveys at the University of Michigan, refused to comment on the numbers.
Daniel Seto, an economist at Nikko
Treasury Market Yields
Tuesday Week Month
3-Month Bill 5.72 5.73 5.73
6-Month Bill 5.96 6.01 5.95
1-Year Bill 6.39 6.34 6.23
2-Year Note 6.98 6.90 6.76
3-Year Note 7.33 7.38 7.16
4-Year Note 7.51 7.57 7.36
5-Year Note 7.92 7.96 7.77
7-Year Note 8.13 8.18 7.98
10-Year Note 8.25 8.32 8.11
20-Year Bond 8.43 8.50 8.33
30-Year Bond 8.42 8.50 8.33
Source: Cantor, Fitzgerald/Telerate
Securities International, pointed out that the Michigan consumers' increased confidence about current conditions contrasted with results of the Conference Board's June consumer survey released last week.
The Conference Board found consumers were a little less confident about current conditions than they had been in May.
Later yesterday morning, the Commerce Department reported that May factory orders rose 2.9%, when the market consensus anticipated only a 1.8% rise.
That followed a revised 2.1% gain in April, which originally was reported as a 1.8% increase.
The May increase is the highest since a 4.4% rise in March 1990.
Mr. Seto said the report was difficult to interpret.
A lot of the strength came from defense orders, with shipbuilding and tanks up 178%, he said. On the other hand, the report did show strength in other manufacturing sectors, including a 4% rise in non-defense capital orders.
Economists say today's numbers, May new home sales and late-June car sales, are both likely to show gains.
Economists surveyed by The Bond Buyer on average expect home sales rose 2% in May, to a 510,000 annual rate, and late-June car sales will come in a 6.5 million annual rate, matching the mid-June sale pace.
"The auto sector is the real key here," said Mark Green, an economist at Wells Fargo Bank. "All the strength we've seen in production numbers has come from autos."
Now that manufacturers geared up auto production, signs that demand is suffering "could really shake people up," Mr. Green said.