A small amount of buying helped Treasury prices inch higher yesterday in nervous pre-election trading.
Late in the day, the 30-year bond was up 1/4 point to yield 7.64%.
"The market did better because a lot of people had gone short in anticipation of the election results, hoping the rest of the crowd would believe a Clinton victory towny was likely," said Kevin Logan, chief economist at Swiss Bank Corp.
Logan said some participants decided to take profits on their short positions by buying securities to close the trades The increase in prices inspired others to cover their short positions.
Traders reported some foreign buying of short-term notes, and the Federal Reserve reportedly bought three- and five-year notes under the table.
The head of a trading desk said some speculators came in to buy when the market hit key levels yesterday morning, including a 6% yield on the five-year and a 4 1/2% yield on the two-year.
The market started to move higher in early New York trading. Participants said the gains reflected a modest amount of buying, including purchases by foreign investors, in overall thin trading.
He said today's price gains were meaningless, though. "This is just noise. I think the market's going lower ultimately, but we're doing some consolidating," he said.
A short-term note trader was also pessimistic about the market, arguing that the combination of a Clinton victory and some signs of stronger economic growth spelled the end of the bond market's rally. The immediate problem that will force yields higher is supply, the trader said. The Treasury Department said today it will sell $37 billion of notes and bonds at next week's refunding and the trader expects the market to demand a concession on that paper. Dealers will be reluctant to load themselves down with securities so close to year's end, and customers, who have had a good year, will also be wary about taking on new risk, he said.
Traders expect another volatile session today as participants react to the election and prepare for Friday's October employment report, although they said the main trade on the election news may occur overseas.
Yesterday's bigger-than-expected decline in September's index of leading indicators had no impact on Treasury prices.
September leading indicators fell 0.3%, instead of the 0.1% decline the market expected, and August's index was revised lower to show a 0.3% decrease as well, instead of the 0.2% decline reported last month.
The decline was the third in four months, and that "doesn't really point to very strong growth ahead, " said Ian Borsook, a senior economist at Merrill, Lynch & Co.
But Borsook said the report was old news for the bond market and also was inconsistent with the strength shown in the third-quarter gross domestic product report.
The only surprise in yesterday's refunding announcement was the reopening of the 6 3/8% notes due in August 2002.
The $37 billion refunding package, $1 billion more than the government sold at the last refunding in August, matched economists' expectations.
The Treasury will sell $15.5 billion of three-year notes on Monday, $11.25 billion of 6 3/8% 9 3/4-year notes on Tuesday, and $10.25 billion of 30-year bonds on Thursday. The first two auctions have been moved forward because of the Veterans Day holiday next Wednesday.
The 6 3/8% 10-year notes have been expensive to borrow in the repurchase market since they were auctioned in August. But some traders and analysts thought the price of the outstanding notes, well below the level at which they were first auctioned, would discourage the Treasury from reopening.
Treasury undersecretary Jerome Powell said the government decided to reopen the issue In order to alleviate an acute, protracted shortage of this security."
But Powell said there was no evidence the 10-year squeeze was deliberate.
If the reopened issue is still trading below par at next week's auction, the discount will be treated for federal income tax purposes as a market discount and not an original issue discount, Powell said.
That means buyers of the 9 3/4% notes will not have to amortize any discount over the time they hold the note, Powell said. Instead, owners will pay taxes only on the notes' interest income and on any price appreciation during the time they hold the security, he explained.
An Internal Revenue Service ruling last March allowed the Treasury to offer such tax treatment when it reopened an issue to counteract a market squeeze.
The December bond futures contract closed 6/32 higher at 102 22/32.
In the cash market, the 7 1/4% 30-year bond was 7/32 higher, at 95 8/32-95 12/32, to yield 7.64%.
The 6 3/8% 10-year note rose 7/32, to 96 17/32-96 21/32, to yield 6.84%.
The three-year 4 5/8% note was up 6/32, at 99 9/32-99 11/32, to yield 4.87%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.03%, the six-month bill off three basis points at 3.24%, and the year bill five basis points lower at 3.41%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.07 2.99 2.77
6-Month Bill 3.31 3.27 2.91
1-Year Bill 3.52 3.46 3.02
2-Year Note 4.87 4.25 3.71
3-Year Note 4.87 4.76 4.16
5-Year Note 5.91 5.78 5.23
7-Year Note 6.41 6.31 5.83
10-Year Note 6.84 6.74 6.27
30-Year Bond 7.64 7.61 7.40
Source: Cantor, Fitzgerald/Telerate