The collapse of the Soviet coup damaged the short end of the Treasury market yesterday as traders dumped the bills and short-term notes they had bought earlier in the week in a flight-to-quality response to the political upheaval in the Soviet Union.
Late in the day, Treasury prices were mixed, with short-term notes 1/8 point lower while the 30-year bond was 1/4 point higher and yielded 8.06%.
Other markets also reacted to the news. Stocks soared, with the Dow Jones industrial average posting an 88.10 point gain, to 3,001.79, and the dollar gave back its improvement against the German mark. The U.S. unit was quoted at 1.7400 marks late yesterday, down from 1.7960 late Tuesday.
The selling at the short end began in London after Russian President Boris Yeltsin said the members of the emergency committee that organized the coup were trying
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.43 5.44 5.73
6-Month Bill 5.49 5.56 5.94
1-Year Bill 5.56 5.65 6.22
2-Year Note 6.21 6.33 6.87
3-Year Note 6.60 6.72 7.24
4-Year Note 6.77 6.86 7.39
5-Year Note 7.23 7.34 7.85
7-Year Note 7.58 7.64 8.08
10-Year Note 7.77 7.80 8.22
20-Year Note 8.01 8.09 8.36
30-Year Note 8.06 8.05 8.41
Source: Cantor, Fitzgerald/Telerate
to leave Moscow by air.
The news caused an immediate shift in market sentiment.
"The whole world's changed once again on the latest headlines that these guys are leaving," a London dealer said.
During the New York morning session, traders got more details confirming that the coup had failed, and yesterday afternoon Soviet leader Mikhail Gorbachev was heard from for the first time this week.
Traders said the activity yesterday was mostly professional, and what professionals were doing was reversing curve trades.
"As the coup seems to have unwound, so have a lot of curve-steepening trades, with the short end becoming battered and the long end seeming to benefit," said Peter Greenbaum, an economist at Smith Barney, Harris Upham & Co.
Traders bet on a steeper yield curve by buying short-term securities and establishing short positions at the long end. Reversing those trades involves covering the short positions by buying long-term paper and selling the short-term paper.
As the short end improved Monday on flight-to-quality buying, the yield curve steepened dramatically, with the 30-year bond yielding more than 200 basis points over the two-year note during the session.
Late yesterday, the 30-year bond's advantage over the two-year note had narrowed to 185 basis points.
A short-term note trader said European investors had suffered the most from yesterday's developments in the Soviet Union.
On Monday, many frightened European money managers converted German marks into dollars and then invested those dollars in short-term Treasuries. Since then, they have taken losses in both the foreign exchange and Treasury markets, the trader said.
"Now that the coup has failed, they're 20 basis points lower on their two-years, and they're down on their foreign exchange," he said. "Foreign money managers just took a bath."
Even after yesterday's backtracking, some participants still own short-term paper that they have experienced huge losses on, and those bad positions will prevent short-term prices from improving in the near future, traders said.
The note trader argued that lack of retail interest will also be a problem for the short end, since bill and short-term note yields are too low to bring in buyers.
"We're seeing virtually no retail under three-year notes," he said. "Even if the Fed eases, I don't think there's much hope because there are no real buyers -- except for [arbitrage] players."
The short end also faces supply, including today's sale of $12.5 billion of year bills and the two- and five-year note auctions next week.
Yesterday, the Treasury announced it will sell $12.5 billion of two-year notes next Tuesday and $9.5 billion of five-year notes next Wednesday, to raise a total of $11.525 billion of new cash. Both issues were the same size as at last month's auctions.
In when-issued trading late yesterday, the two-year note was bid at 6.26% and the five-year note was quoted at 7.26%.
Traders paid little attention to the July budget deficit, which jumped as expected from the previous July's gap.
The Treasury said it was $40.79 billion in the red last month, which marks a 57.4% increase from the $25.9 billion deficit last July.
The September bond future contract closed 5/16 higher, at at 97 29/32.
In the cash market, the 30-year 8 1/8% bond was 9/32 higher, at 100 19/32-100 23/32, to yield 8.06%.
The 7 7/8% 10-year note rose 3/32, to 100 17/31-100 21/32, to yield 7.77%.
The three-year 6 7/8% note was off 5/32, at 100 21/32-100 23/32, to yield 6.60%.
Rates on Treasury bills were sharply higher, with the three-month bill up 17 basis points at 5.29%, the six-month bill up 13 basis points at 5.28%, and the year bill 12 basis points higher at 5.29%.
In other news, Salomon Brothers said yesterday that the customer whose name it misused in two Treasury auctions was Mercury Asset Management.
Salomon admitted on Aug. 9 it had submitted bids in the name of a customer who had not authorized such bids at both the four-year note sale in December 1990 and the five-year auction in February of this year, but it did not reveal the name of the customer at that time.
"We deeply regret this clear violation of a valued customer relationship," Salomon said in a press release.