Treasury securities of all maturities increased in price yesterday as bullish sentiment regained control of the market after a few days of consolidation.
Late yesterday, the 30-year bond was up 3/4 point to yield 7.62%, while short- and intermediate-term notes were 1/8 to 5/8 point higher.
The market began to improve overnight in London, stalled out during the morning in New York, then began inching higher during the afternoon.
"It's a feeding frenzy," said Jan Hurley, a senior market analyst at Chase Securities. "Every sector is flying."
"I can't help thinking it's getting ahead of itself," Ms. Hurley added.
Traders said intermediate notes led the rally, with the five-year note outperforming everything else on the curve. The 6 3/8% five-year note rose 1/2 point and closed at a 5.75% yield.
"The long end and the short end followed intermediates," said Frank Sanella, a Treasury market analyst at Stone & McCarthy Research Associates.
Mr. Sanella said 10-year notes got a boost when corporate dealers took off some short positions they had put on last week to hedge the heavy corporate issuance.
Yesterday's new corporate deals totaled close to $4 billion if the $1 billion global issue of 10-year notes offered by Matsushita Electric is included, but that supply did not seem to have any adverse effects on the Treasury market.
The five-year notes also benefited from foreign buying in advance of today's Bundesbank meeting, Mr. Sanella said.
Traders suspect the Bundesbank may raise one of its key rates at today's meeting in an attempt to rein in money supply growth.
Ms. Hurley said a German rate increase might provide Treasury traders with an excuse to take profits. But she questioned whether it would have any long-term impact, given that U.S. interest rates are already well below German yields.
If the interest rate differential widens 25 to 50 basis points, "I don't think that will alter the pattern of capital flows," Ms. Hurley said.
The Treasury market has improved markedly since the June employment report showed the economy lost ground last month.
Yesterday's economic news provided more evidence of June's weakness.
Traders said the numbers had little impact on Treasury prices, though, because they were in line with the market's expectations.
June industrial production fell 0.3%, when the consensus forecast called for a 0.4% decline. It was the first time industrial output had fallen since January.
June's capacity utilization rate was 78.5%, down from a revised 78.9% in May.
"Industrial production confirmed the weakness in June and showed it was widespread," said Daniel Seto, an economist at Nikko Securities Co.
But the decline in June production "was not as disastrous as the [June] employment report suggested," Mr. Seto said. "That fits in with the market's perception that the employment report may have been slightly exaggerated."
Also yesterday, the Commerce Department said May business inventories rose 0.1%, following a revised 0.3% gain in April.
Mr. Seto said that inventory report was also consistent with the notion of a lackluster recovery.
"At this stage, there seems to be some hesitancy on the part of businesses to stock up on inventories," he said.
This morning's economic indicators, June housing starts and the weekly jobless claims, are not likely to set the market on fire.
The consensus forecast calls for a 3.3% decrease in housing starts, to a 1.19 million annual rate. But analysts say the Fed's recent 1/2-point cuts in both the discount and funds rates should lead to increased demand for housing in coming months.
The weeks jobless claims are expected to inch lower to 415,000 in the week of July 4, just 1,000 below the previous week's total.
Mr. Seto said if claims slid more than expected, traders could console themselves by thinking about the sizable layoffs announced recently by various corporations.
The September bond futures contract closed 9/16 higher at 102 17/32.
In the cash market, the 30-year 8% bond was 3/4 higher, at 104 8/32-104 12/32, to yield 7.62%.
The 7 1/2% 10-year note rose 19/32, to 104 9/32-104 13/32, to yield 6.87%.
The three-year 5 7/8% note was up 9/32, at 103 2/32-103 4/32, to yield 4.68%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.18%, the six-month bill off five basis points at 3.23%, and the year bill nine basis points lower at 3.33%.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 3.23 3.28 3.68
6-Month Bill 3.30 3.37 3.81
1-Year Bill 3.43 3.60 4.6
2-Year Note 4.19 4.36 4.92
3-Year Note 4.68 4.87 5.46
5-Year Note 5.76 5.91 6.39
7-Year Note 6.34 6.41 6.80
10-Year Note 6.87 6.88 7.20
15-Year Bond 7.23 7.24 7.49
30-Year Bond 7.62 7.60 7.81