Treasury note and bond prices managed to improve yesterday even though the market got a couple of economic indicators showing more strength than expected.
Late in the afternoon, the 30-year bond was up 1/4 point and yielded 7.82%.
Prices initially fell yesterday morning when the Commerce Department reported an 11% jump in May housing starts, almost double the 6.5% consensus forecast.
But the market began to retrace its losses after the May industrial production report was released, even though May output rose 0.6% when most economists though it would be up only 0.5%.
Although The indicators were stronger than expected, they depicted at best a sluggish recovery, and that scenario is old news for the bond market, traders said.
They said yesterday's gains reflected genuine buying by retail investors, but added that the buying had more to do with technical factors than economic fundamentals.
A government note trader said when participants realized the unfriendly numbers had not resulted in heavy selling, "a trading mentality took hold and they started to buy it."
Traders said there had been good retail buying all day, with short-and intermediate-term notes out-performing the rest of the market.
"These guys have their buying shoes on," a coupon trader said.
The market got a little extra boost near the close of futures, when the weekly Johnson Redbook report took the September bond futures contract through a resistance level at 100-3/32, which prompted further buying, a bond futures trader said.
The Johnson Redbook survey of department stores reportedly said sales in the second week of June were down 0.1% from the previous week, and sales for the first two weeks combined were down 4.5% from the first two weeks of May.
But other participants questioned the wisdom of reacting to the Johnson Redbook numbers because the weakness might just reflect the fact that Father's Day is later than usual this year.
Traders said the announcement late in the afternoon that President Bush and Russian President Boris Yeltsin had agreed to reduce the number of nuclear warheads did not have any impact on Treasury prices.
The 11% increase in May brought housing starts to a 1.23 million annual rate. April's starts were revised a little lower to 1.108 million, from the 1.115 million reported last month.
But analysts said the weakness in May permits suggested the strength in starts was misleading. Permits, an indicator of future building activity, fell 0.7% to 1.05 million in May, their lowest level since November.
Sally Kleinman, a financial markets analyst at Chemical Securities, said the decline in permits "suggest we're in a muted housing recovery."
Matthew Alexy, an economist at First Boston Corp., said the May permits level "tells us housing is moving sideways at best."
Mr. Alexy said he was more impressed with the industrial production report, even though the 0.6% increase was only slightly above market expectations.
Economists expected improvement in the auto sector to drive the increase in May production, he said, but instead the gains were widespread and included increases in consumer durables and business equipment.
TREASURY MARKET YIELDS
Tuesday Week Month
3-Month Bill 3.71 3.74 3.59
6-Month Bill 3.84 3.92 3.71
1-Year Bill 4.09 4.17 3.96
2-Year Note 4.97 5.07 4.93
3-Year Note 5.48 5.63 5.55
4-Year Note 6.39 6.57 6.42
5-Year Note 6.41 6.57 6.44
7-Year Note 6.81 6.95 6.83
10-Year Note 7.21 7.32 7.18
15-Year Bond 7.50 7.60 7.48
30-Year Bond 7.82 7.87 7.76
Source: Cantor, Fitzgerald/Telerate
Yesterday morning, Federal Reserve Chairman Alan Greenspan said in testimony on Capitol Hill that he expects further improvement in the core rate of inflation. Traders said Mr. Greenspan's remark had added to the market's positive tone.
Today the market will get more economic news when the Federal Reserve releases its "beige book" at midday, as well as a look at upcoming supply when the Treasury announces the size of next week's two- and five-year note sales.
The beige book is expected to depict a modest economic recovery, and if that is the case, traders say it will not affect prices.
Nor is the auction announcement expected to ruffle many feathers. Economists think the government will leave the issue sizes unchanged, with the two-year sale totaling $14.75 billion and the five-year auction at $10.25 billion.
Light inventories have been one of the technical factors supporting Treasury prices in recent sessions. Traders said today's announcement won't change that, because the supply will only matter to the market when they actually have to bid on the securities.
Mr. Alexy questioned whether the supply would hurt the market even at auction time.
The downward revisions to estimates of this year's federal deficit means the supply over the second half of the year will not be as onerous as economists originally thought, he said, and in any case, the short-term paper is always more popular than long-term auctions.
"The [August] refunding will be the market's next significant challenge, not the twos and fives," Mr. Alexy added.
The September bond futures contract closed 11/32 higher at 100-3/32.
In the cash market, the 30-year 8% bond was 9/32 higher, at 101-27/32-101-31/32, to yield 7.82%.
The 7-1/2% 10-year note rose 11/32, to 101-27/32-101-31/32, to yield 7.21%.
The three-year 5-7/8% note was up 1/8, at 100-31/32-101-1/32, to yield 5.48%.
Rates on Treasury bills were mixed, with the three-month bill up one basis point at 3.65%, the six-month bill down two basis points at 3.74%, and the year bill off two basis points at 3.94%.