Reports that car sales were weaker than expected in early October pushed Treasury prices higher yesterday, with the 30-year bond closing up 1/4 point to yield 7.85%.
Short-term notes ended 1/8 to 1/4 point higher, as the short end continued to outperform long-term paper.
Traders said activity yesterday was subdued as participants slowly started back to work after a long weekend. The U.S. cash govenments market was closed Monday for Columbus Day.
The Ford sales reported yesterday morning were not that bad, but the afternoon sales figures, especially the 19.2% plunge reported by General Motors, suggested consumers are still wary of buying big-ticket items.
"When GM came in way below expectations, that probably caught a few people shot." a government coupon trader said. So short-covering and some new buying has brought us back to the highs."
Michael Niemira, a business economist at Mitsubishi Bank, said cars sold at a 5.5 million annual rate during the first 10 days of October, down from the 6.6 million economists expected and far below the 7.2 million pace in late September.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 5.08 5.13 5.32
6-Month Bill 5.17 5.24 5.44
1-Year Bill 5.25 5.30 5.50
2-Year Note 5.81 5.88 6.11
3-Year Note 6.07 6.13 6.35
4-Year Note 6.27 6.32 6.55
5-Year Note 6.76 6.81 7.05
7-Year Note 7.11 7.16 7.34
10-Year Note 7.41 7.42 7.55
15-Year Bond 7.69 7.71 7.81
30-Year Bond 7.85 7.81 7.88
Source: Cantor, Fitzgerald/Telerate
He said the only good news in the report was the moderate inventory level of 53 days' supply, down from the normal level of 60 to 65 days.
Tom Webb, chief economist at the National Automobile Dealers Association, said the "ailing economy" was to blame for the decline in sales.
"It's simply a matter of money: people don't have enough," Mr. Webb said. "Household net worth continues to erode, job prospects have failed to brighten, and nominal wage gains are modest at best."
Mr. Niemira cautioned against reading too much into the volatile 10-day figures, but said if the weakness in car sales continued, it would be a bad omen for fourth-quarter output.
As the short end outperformed the long end yesterday, the yield curve steepened further, with the 30-year's yield advantage over the two-year note widening to 204 basis points from 200 late Friday.
Short-term prices gained even though the Federal Reserve stayed out of the market at Fed time yesterday, indicating that it is still targeting a 5 1/4% funds rate.
Traders have been waiting for weeks for a signal of a 25-basis-point cut in the target, but said the Fed's inaction yesterday had done nothing to discourage their easing hopes.
A coupon trader said investors were unlikely to sell their short-term paper as long as they expected the Fed to ease.
"The front end is still in fair technical shape," he said. "As long as that Fed carrot is in front of us, I don't think there will be too much downside."
Meanwhile, the long end continues to be plagued with reports that Japanese investors are selling Treasury Strips, which puts pressure on bond prices.
Given that selling, "net net, there's very little new money flowing into sevens through the 30-year," another coupon trader said.
Traders said they were surprised at how steep the coupon curve had become, but warned that it was unwise to fight the trend.
The coupon trader refused to guess how steep the curve might get. "I didn't think I'd ever see it here."
Treasury bill rates made new lows at yesterday's auction. The three-month was sold at an average rate of 4.99%, the lowest since June 26, 1977, and the six-month came at 5.03%, the lowest since April 25, 1977.
Traders said the news of Citicorp's corp's larger-than-expected third-quarter loss increased interest in bills yesterday.
The December bond future contract closed 7/32 higher at 100.
In the cash market, the 30-year 8 1/8% bond was 5/16 higher, at 102 31/32-103 3/32, to yield 7.85%.
The 7 7/8% 10-year note rose 9/32, to 103/103 4/32, to yield 7.41%.
The three-year 6 7/8 note was up 5/32, at 101 31/32-102 1/32, to yield 6.07%.
Rates on Treasury bills were mixed, with the three-month bill steady at 4.96%, the six-month bill down two basis points at 4.99%, and the year bill three basis points lower at 5%.
With car sales out of the way, the market will have to wait until tomorrow for the next meaningful numbers. Traders see tomorrow's September consumer price report as the key to whether the Fed eases or not; analysts expect the September index to rise 0.2%.
Today, the Treasury will announce the details of next week's two-year and five-year note sales.
The government is expected to increase the two-year issue to $14 billion to offset the call of 7 1/2% notes due in 1993 that was announced last week. Traders said the bigger two-year was already accounted for in prices.