The market hit warp speed yesterday as broad-based buying interest emerged to help Treasuries put in a stellar performance.
The 30-year bond closed up almost a full point yesterday to yield 6.09%, the lowest level in 16 year.
Market bears turned into bulls as participants who had been fighting the recent rally jumped on the bandwagon and purchased securities, traders said.
The long bond continued to benefit from scarcity value on the back of the Treasury's new semiannual bond auction schedule. Accounts looking to increase the maturity of their portfolios scrambled to purchase issues at current levels, rather than at lower yield levels.
The buying frenzy started out in the futures market when the September bond contract broke above long-standing resistance levels, taking dealers by surprise and forcing them to cover short positions.
That price action carried over into the cash market and prompted buyers from many fronts to purchase securities before the market got away from them.
The positive tone of the market brought a steady stream of buyers into the market, and dealers reported solid buying interest across the yield curve, particularly at the long end.
"Positive psychology continued to bring the market higher," said Fred Leiner, market strategist at Continental Bank. Leiner sees little downside risk in coming sessions as the sheer strength of the rally is keeping players from shorting issues.
Most of the real buying interest yesterday came from fund managers looking for duration from Treasuries to offset the impact of falling rates on their other fixed-income holdings, particularly mortgage-backed securities.
"The collapse of the mortgage market means that people are holding cash instead of bonds and they're putting that money into Treasuries," said James Kenney, head government trader at Prudential Securities.
Kenney further noted that low long-term interest rates have caused problems for holders of mortgage bonds because of rapid prepayments.
The 10-year note also benefited from the flows out of mortgage-backed securities and from municipalities. State and local governments were also good buyers of Treasuries yesterday due to municipal defeasance programs.
Adding credibility to the market's performance yesterday was the ability of the old 7 1/8% 30-year bond to keep pace with the current issue. The spread between the two issues narrowed to 12 basis points from 20 on Wednesday.
The old and new 30-year bonds continue to gain support from the weak economy and prospects for low inflation, said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, adding that few hurdles stand in the way of lower yields.
"There's nothing to stop these rates from going lower in the near term," Wesbury said.
A strong rally in the futures market also helped the old 30-year bond to improve yesterday as scarcity in the current bond created more interest in off-the-run and futures issues, said Jim Bianco, director of research at Arbor Trading Group, Barrington, Ill. Bianco said that few in the market expected the bond contract to break above 118.31. It closed the session at 119.22.
"The bond contract is such that you don't want to stand in front of it," Bianco said.
Economic data released yesterday had little impact. In what has become a recurring theme, the market popped up in response to weak figures but then edged lower as dealers used the upticks to take profits.
Initial jobless claims rose 8,000 in the week ended Aug. 21 to 332,000, slightly higher than expectations for a slight decline. Participants said the release supports the market's view that the labor sector remains weak and that the overall economy continues to trudge along.
"The claims data fit in with the market's assessment of conditions," said Michael Niemira, economist at Mitsubishi Bank. "Growth is real sluggish and is unlikely to pick up anytime soon."
Late yesterday, the Federal Reserve reported its weekly money supply figures. The Fed reported that MI rose $4.2 billion, M2 rose $8.9 billion, and M3 rose $10.0 billion.
In futures, the September contract ended at 119.22.
In the cash markets, the two-year note was quoted late yesterday up 1/32 at 100.02-100.03 to yield 3.82%. the 5 1/4% five-year note ended up 7/32 at 99.26-99.28 to yield 4.77%, the 5 3/4% 10-year note was up 17/32 at 102.16-102.18 to yield 5.41%, and the 6 1/4% 30-year bond was up 29/32 at 102.03-102.05 to yield 6.09%.
The three-month Treasury bill was up two basis points at 3. 01 %, the six-month bill was unchanged at 3.10%, and the year bill was down one basis point at 3.22%.