Some selling pressure from corporate hedging and the continuing lack of retail interest left Treasury note and bond prices lower yesterday.
Late in the afternoon, the 30-year bond was down V2 point to yield 6.91%, while note prices were as much as 1/4 point lower.
Traders said volume in the Treasury market remained light because many investors prefer not to participate until they see the upcoming inflation reports. The May producer price index is due out Friday and the May consumer price index will be released next Tuesday.
"The market is in suspended animation awaiting the PPI and CPI readings," said Cary Leahey, a senior economist at Lehman Brothers.
Bond traders are worried the Federal Reserve will tighten monetary policy if the producer and consumer reports show sizable gains. According to one news report a couple of weeks ago, increases of 0.4% or more in the reports' core readings, excluding food and energy prices, would be enough to cause a tightening.
A few Fed officials spoke yesterday, but traders said their comments contained no new information and had little impact on bond prices.
The short end improved a little in early trading yesterday, but those gains disappeared during the afternoon.
A bill trader said the front end initially benefited from some purchases related to municipal defeasance and interest rate swap deals. "Once that dried up, we didn't have any going-away retail buying, and the market just lost its bid," he said."
There were rumors that the short end weakened because a hedge fund sold a huge quantity of two-year notes.
Some traders blamed corporate hedging for the weakness in intermediate and long-term Treasuries. Corporations sold more than $3 billion of debt yesterday, including a $1.8 billion IBM Corp. deal.
Traders said Treasury securities moved lower because corporate dealers were hedging their unsold inventories by setting up short positions in the Treasury market.
The dollar's weakness against the yen was another problem for the long end of the bond market yesterday. The dollar hit a new post-war low at 106 yen yesterday, and the Federal Reserve's intervention in support of the dollar seemed to have little impact. Late yesterday, the dollar was quoted at 106.13, down from 107.20 late Monday.
The Johnson Redbook came out yesterday afternoon while prices were heading lower, but traders said the report did not cause the losses.
In fact, the Redbook was weaker than the market expected. It showed department store sales in the first week of June were up 1.2% from the same period in May.
The September bond futures contract closed lower, at 1
In the cash market, the 71/8% 30-year bond was 17/32 lower, at 102 18/32- 102 20/32, to yield 6.91%.
The 6 1/4% 10-year note fell 6/32, to yield 101 4/32-101 6/32, to yield 6.08%.
The three-year 4 1/4% note was down 2/32, at 98 27/32-98 29/32 , to yield 4.65%.
Rates on Treasury bills were mixed, with the three-month bill down two basis points at 3.14%, the six-month bill up one basis point at 3.31%, and the year bill one basis point higher at 3.51%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.18 3.09 2.936-Month Bill 3.39 3.26 3.061-Year Bill 3.64 3.52 3.202-Year Note 4.30 4.14 3.753-Year Note 4.65 4.51 4.115-Year Note 5.33 5.26 4.997-Year Note 5.72 5.67 5.4810-Year Note 6.08 6.04 5.8630-Year Bond 6.91 6.87 6.80Source: Cantor, Fitzgerald/Telerate