Treasury prices ended yesterday's session mostly higher as market participants geared up for this week's barrage of economic reports and new supply.
Prices took it on the chin for the better part of the session, but gradually recovered though the afternoon.
At the close, the benchmark 30-year bond was quoted Up 10/31 points to yield 6.67%. Supply concerns now come to the forefront as the market braces for the Treasury Department's monthly auctions of two-year and five-year notes. Both issues have sold poorly in recent months, and some traders expect more of the same at the auctions this week.
The market is also up against a gamut of economic indicators this week, including the preliminary report on second-quarter gross domestic product and the report on orders for durable goods in June.
"Treasuries are faced with a lot this week, and today's price action clearly shows that the market is preparing for it," said Steven R. Ricchiuto, chief economist at Barclays de Zoete Wedd Securities Inc. "The market will take its cues first from the auctions and then from the fundamental news later in the week."
Long-dated paper took the brunt of yesterday's early morning price action as investors moved in on the yield curve to take advantage of a flattening trend. The long bond led the march south, followed closely by the 10-year note.
In keeping with a trend that has characterized trading in recent days, the market performed well in both the Asian and European sessions, but lost steam once New York trading got under way. Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 3.13 3.08 3.116-Month Bill 3.28 3.22 3.241-Year Bill 3.58 3.38 3.462-Year Note 4.17 3.97 4.043-Year Note 4.50 4.26 4.355-Year Note 5.21 4.98 5.067-Year Note 5.55 5.32 5.4210-Year Note 5.89 5.68 5.7730-Year Bond 6.67 6.53 6.66Source: Cantor, Fitzgerald/Telerate
Traders generally attribute this lack of follow through to the absence of retail investors in the market. Spooked by fears of higher inflation and a tightening of monetary policy, players on the buy side are content to stay on the sidelines and watch how the market fares this week.
"Retail is not playing in here, and that lack of larger accounts has kept us from moving higher," said one head of fixed-income trading at a primary dealership.
Traders said that increases in gold and silver prices through the morning and lingering fears of higher commodity prices as a product of continued flooding in the Midwest have again brought inflation concerns to the forefront and created pressure at the long end of the market.
Consequently, a number of accounts moved yesterday to take advantage of the flattening trend in the yield curve.
"There are huge profits in the flattening trade, and people see that as their only means of making money in today's trade," the head trader said.
The risk is that this lack of retail sponsorship could have a dampening effect on the note auctions this week. While banks have traditionally been the biggest buyers of two-year and five-year notes at auction time, traders agree that prices will have a hard time improving without the help of larger accounts.
As a result, dealers spent the better part of the morning establishing short positions in expectation of lackluster interest for this week's round of note auctions.
On the bright side, asserted Kevin Flanagan, money market economist at Dean Witter Reynolds, the recent price action and resulting backup in rates has moved both the two-year and five-year issues into attractive territory and may have improved prospects for the note sales.
"The recent rise in rates should prove to be a supportive influence, and some cash will move off the sidelines," Flanagan said.
Economic indicator reports have taken on increased significance this week in the wake of Federal Reserve Chairman Alan Greenspan's testimony to Congress last week. Greenspan sent an unmistakable message that the bond market rally is over and interest rates are heading higher.
Michael Moran, chief economist at Daiwa Securities, said Greenspan's warning about higher short-term rates and the announcement of the Fed's reduced reliance of money supply figures have put economic data bank on the front burner. He said the market will pay close attention to Thursday's gross domestic product report, from which the market will get its first comprehensive view of overall economic activity in the second quarter.
Moran also cautioned that Wednesday's durable goods report, which comes out ahead of the five-year note auction, could also prove to be a formidable tone-setter for the market.
The market has already received a dose of bad news this week. The National Association of Realtors reported that existing home sales advanced 1.9% in June to a seasonally adjusted annual rate of 3.69 million units. This was the highest sales rate in five months and followed a revised 4.9% gain in May, previously reported at 4.6%.
Brian Wesbury, chief economist at Griffin, Kubik, Stephens and Thompson, said the report points to renewed activity in the housing sector, which is likely to translate into gains in future durable good orders and employment reports.
"The market will take a close look at the data and interest in supply this week and decide where to go from here," Wesbury said. "We're treading water until then."
In the cash markets, the 4 1/8% two-year note was quoted late yesterday unchanged at 99.28-99.29 to yield 4.17%; the 5 1/8% five-year note was also unchanged at 99.17-99.19 to yield 5.21%; the 6 1/4% 10-year note was up 7/32 at 102.16-102.18 to yield 5.89%; and the 7 1/8% 30-year bond was up 10/32 at 105.23-105.25 to yield 6.67%.
In when-issued trading, the five-year note -- to be auctioned Wednesday -- was quoted unchanged at 5.24%.
The three-month Treasury bill was down one basis point at 3.09%; the six-month bill was three basis points lower at 3.21%; and the year bill was down one basis point at 3.46%.