Treasury note and bond prices slid in mid-afternoon yesterday as the market's inability to break through a technical resistance level spurred some selling.
In a separate development, the financing rates for the 5 1/8% two-year note loosened up considerably, suggesting more of the notes were circulating on the Street.
Late in the day, the 30-year bond was off 3/8 point to yield 7.87%, while short-term and intermediate notes were unchanged to slightly lower.
"We lost our sponsorship later in the day," said William Sullivan, director of money market research at Dean Witter Reynolds Inc. "Most of the downward bias occured within the last few hours."
A government bond trader said prices declined because participants with long positions got discouraged when the market failed to break through resistance.
"We tried to take it up and get through some resistance levels, and it didn't work," the trader said. "Some longs got frustrated and came in and sold the market later."
He said some hedging by corporate and mortgage-backed dealers also weighed on Treasury prices, including hedging of yesterday's Canadian $2 billion Hydro Ontario global 10-year note deal.
Scott Winningham, chief market analyst at Stone & McCarthy Research Associates in Princeton, N.J., said the market had established a "triple top" yesterday, with the September bond future's high of 99 29/32 matching up with Friday's high of 99 31/32 and the 99 28/32 top posted on May 29.
Mr. Winningham said, though, that yesterday's losses were not that impressive, "except we've had nothing happen for the last two days."
Mr. Sullivan said the increasing availability of two-year notes may have served as "a springbord for profit-taking" late in the session.
On Monday, two-year notes became scarce and their repo rate fell close to zero when general collateral was trading at 3.80%.
Yesterday, the repo rate on the two-years "started at 1 7/8% and has traded as high as 3.5%, "Mr. Sullivan said. "The squeeze on the May two-year has come to an end."
Some traders cited the Johnson Redbook survey and commodity prices as factors in the small sell-off.
The Johnson Redbook reportedly showed retail sales in early June were up to 5.6% on an unadjusted basis and up 0.2% if seasonally adjusted. Meanwhile, the Commodity Research Bureau index rose .63 to 212.54.
Traders said activity was almost as sparse yesterday as it had been Monday. They expect trading to pick up a little today as dealers adjust their positions ahead of tomorrow's indicator, which include May retail sales and producer prices.
Mr. Sullivan said yesterday's price decline just confirmed the market is range-bound. The 30-year was yielding 7.84% at midday, before prices began to drift lower, and "we've learned retail sponsoship for the bond market wanes when the 10 year gets below 7.85%," he said.
"I think we're in a wait-and-see-mode until we get more salient data," Mr. Sullivan added.
The September bond futures contract closed 7/16 lower at 99 9/32.
In the cash market, the 30-year 8% bonds was 13/32 lower, at 101 9/32-101 13/32, to yield 7.87%.
The 7 1/2% 10-year note fell 3/16, to 101 2/32-101 6/32, to yield 7.32%.
The three-year 5 7/8% note was unchanged, at 100 19/32- 100 21/32, to yield 5.62%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.68%, the six-month bill off two basis points at 3.81%, and the year bill one basis point lower at 4.01%.