Long-term Treasury prices rallied yesterday on a rumor that the Fed was buying bonds for a customer and on some friendly comments made by Federal Reserve Chairman Alan Greenspan.
Late yesterday, the 30-year bond was up 1/2 point to yield 7.61%, while short-and intermediate-term notes were 1/8 to 1/4 point higher.
"There were a lot of rumors on the Street today that the Fed was buying bonds," said Anthony Chan, a senior economist at Barclays de Zoete Wedd Government Securities.
Mr. Chan said the Fed reportedly purchased $150 million to $250 million of bonds, possibly on behalf of a foreign central bank. "While that's not a great number, the Street is hoping this is the beginning of a trend," he said.
A spokesman at the Federal Reserve Bank of New York said the bank does not comment on its operations for customers.
Jay Goldinger, a principal at Capital Insight in Los Angeles, said the dollar's resurgence this week may have made Treasury securities more attractive to foreign investors.
In the wake of the central bank purchases of dollars on Monday, "the dollar's perked up and foreigners are probably a little more willing to buy [U.S.] paper without fearing dollar risk," he said.
Analysts said the market also liked some of Mr. Greenspan's remarks during his second day of Humphrey-Hawkins testimony. Yesterday, Mr. Greenspan testified before a subcommittee of the House Banking Committee.
Mr. Chan said Mr. Greenspan's comment that the Fed was considering lowering its targets for money supply growth at some later date "seemed to get the market excited."
The Federal Reserve previously seemed worried about the weak money supply growth, citing it as a reason for its last two easings.
But the long end of the bond market "certainly doesn't want the Fed to open the spigots" and was reassured by Mr. Greenspan's apparent lack of concern yesterday, Mr. Chan said.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 3.21 3.23 3.71
6-Month Bill 3.31 3.30 3.83
1-Year Bill 3.48 3.43 4.06
2-Year Note 4.23 4.19 4.96
3-Year Note 4.69 4.68 5.41
5-Year Note 5.73 5.76 6.38
7-Year Note 6.31 6.34 6.78
10-Year Note 6.83 6.87 7.19
15-Year Bond 7.19 7.23 7.49
30-Year Bond 7.61 7.62 7.81
Source: Cantor, Fitzgerald/Telerate
William Griggs, a managing director at Griggs & Santow Inc., said Mr. Greenspan's optimism that inflation will move lower, and the possibility that could help move long-term rates lower, may also have given the bond market a lift.
As the market started its day in the Far East, short-term Treasury prices inched higher as the Japanese stock market made a new six-year low. The Nikkei index of Japanese stocks fell 460.46 points, or 2.9%, to 15,541.95, the lowest close since mid-April of 1986.
European stock markets followed the Japanese market lower, with German stocks down 1.9% and the FTSE index of British stock prices off 1.5% at midday.
But short-term note prices gave back some of their overnight gains when U.S. stock prices showed only modest losses. The Dow Jones industrial average closed 30.80 points lower at 3277.61.
Traders were reluctant to link any of yesterday's price movement to White House spokesman Marlin Fitzwater's comment that military force might be used against Iraq.
Traders said it was hard to decipher what renewed fighting in Iraq would mean for the Treasury market.
It would be negative to the extent that it pushed oil prices higher or increased U.S. defense expenditures, but could be a plus for the bond market if it caused a flight-to-quality rally in the dollar, they said.
A government bond trader said Iraq's quick defeat in last year's war suggested any fighting would not last long, and added that an oil rally would be limited because the market has already factored in the lack of Iraqi oil.
The bond market showed no reaction to the news that the federal government ran a $3.8 billion budget surplus in June. That was an improvement from the $2.6 billion deficit last June, but analysts said the surplus was in line with expectations.
Also yesterday, the Treasury said it will sell $15 billion of two-year notes Tuesday and $10.5 billion of five-years Wednesday. Those sizes were just what the market expected.
Late yesterday, the when-issued two-year note was bid at 4.31% and the when-issued five-years were quoted at 5.77%.
The September bond futures contract closed 19/32 higher at 103.
In the cash market, the 30-year 8% bond was 9/16 higher, at 104 12/32-104 16/32, to yield 7.61:
The 7 1/2% 10-year note rose 5/16, to 104 19/32-104 23/32, to yield 7.61%.
The three-year 5 7/8% note was up 3/32, at 103-103 2/32, to yield 4.69%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.17%, the six-month bill off two basis points at 3.24%, and the year bill three basis points lower at 3.37%.