The buying frenzy continued yesterday as money flowed into Treasuries and pushed the yield on the long bond to yet another record low.
The 30-year bond closed up 11/32, to yield 6.16%. the lowest level since the Treasury began regular bond auctions in 1977.
Supply proved to be only a temporary hurdle for the market as yields continued their march south yesterday. The second round of the Treasury's monthly note auctions attracted solid demand and dragged buyers into the market.
Buying came from the Federal Reserve, the primary dealer community, retail and foreign accounts, and municipalities, participants said.
The Fed was in buying Treasuries under the table for customer accounts. Dealers bought securities to fill orders for customers and build inventories for the impending demand as prices continue to grind higher. Retail accounts retained a herd mentality and bought Treasuries in fear that the market will get away from them as prices rise further.
Foreign accounts were aggressive buyers, mostly on the back of expectations for a rate cut by Germany's central bank today. Investors abroad are looking to shield themselves from currency risk against that backdrop and benefit from a stronger U.S. dollar.
State and local governments purchased short and intermediate Treasuries yesterday as they refunded older, higher interest debt by issuing new securities.
"The market's tone is very positive and buyers are everywhere," said Joseph Liro, chief economist at S.G. Warburg & Co.
In recent sessions, noted Liro, any backup in rates has been met by buyers looking to increase the size of their portfolios without paying top dollar for their securities. That dynamic continued yesterday and dissuaded sellers from testing the market's resolve, particularly after the five-year note auction, which participants said fueled the rally.
The Treasury set a 4 3/4% coupon on $11 billion of five-year notes it auctioned at a 4.87% yield, or a price of 99.473.
The Treasury received bids totaling $28.64 billion and accepted $11 billion, including $570 million of noncompetitive tenders. The median rate was 4.84%.
Investors in the New York Federal Reserve District submitted tenders totaling $26.36 billion, of which $10.27 billion, or 93.4%, was accepted. New York had been expected to bid aggressively and take down most of the issue.
With the completion of the latest round of monthly auctions, the Treasury supply calendar thins out for the rest of the quarter. The only supply facing the market will be next month's two-year and five-year note auctions and the weekly bill auctions.
The results of the five-year auction kicked off a rally at the front and intermediate sectors of the curve, which in turn helped the long end improve. In what has become a recurring theme, the long end opened yesterday's session on a weak note and firmed later in the day as rallies at the short and intermediate sectors of the curve propped the market up.
Fed Governor Susan Phillips added more fuel to the rally with some encouraging comments about inflation. Phillips forecast that the consumer price index for 1993 will come in below the 2.9% rate in 1992.
The September bond contract also got a boost as the rally in the cash bond caught many in the futures market by surprise, spurring a short-covering rally.
"The market was seen as overbought after recent price action and people positioned themselves for a downward correction," said Joseph Plauche, senior financial futures analyst at Dean Witter Reynolds in Chicago. "The shorts got chased out of the market. "
Events in world currency markets were another supportive factor in the market's performance yesterday.
Lisa Finstrom, senior currency analyst at Smith Barney Shearson, expects the German Bundesbank to cut its discount rate by 25 basis points today to help jump-start Germany's weak economy.
While the rate cut has already been priced into the foreign exchange market, Finstrom said lower interest rates in Germany will give other European nations room to cut rates and will result in weaker currencies abroad.
"The general trend toward lower rates in Europe is supportive to the dollar," Finstrom said.
On the economic indicator front, the Commerce Department reported that new orders for durable goods in July fell 3.8% to a seasonally adjusted $127 billion, resulting primarily from a large drop in transportation equipment. Analysts on average had expected a decline of about 1.5%.
This is the sharpest decline since December 1991 when orders fell 5.4%, and is the fourth drop in the last five months. It followed a revised 4.5% gain in June, previously reported as a 3.8% gain.
Transportation equipment declined 18.1% in July, primarily due to aircraft and parts, and autos and parts.
Because the latest report was pulled lower by hefty declines in the volatile transportation component, economists said it provided market participants with few new clues about the manufacturing sector or the overall economy.
"The report shows continued slow growth in manufacturing and the economy, but it doesn't say anything new about overall conditions." said Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp. Like most analysts, Schaja said the durable goods figures were neutral for the bond market.
In other economic data, the National Association of Realtors reported that existing home sales surged 5.4% in July to a seasonally adjusted annual rate of 3.69 million units, the highest rate all year.
The increase marked the third straight monthly advance following a revised gain of 1.7% in June, previously reported as an increase of 1.9%. Association officials attributed the strong pace of sales to extremely low mortgage rates. The Federal Home Loan Mortgage Corp. reported that the average 30-year fixed rate in July sank to 7.21%, the lowest ever recorded.
A senior association official offered an upbeat assessment of the numbers. "Summer generally is busy, but this is extraordinary," he said.
But market analysts said the home sales report showed exactly what one might expect in a low interest rate environment and is an encouraging sign for the housing market. They cautioned that housing starts and building permits remain subdued and the fact that shoppers are buying existing homes is a negative for future housing activity.
"Low interest rates have inspired no real new construction but they have helped the sale of those already standing." said Carol Stone, money market economist at Nomura Securities. "You need a pickup in new building to help the economy."
On the economic calendar today, the Labor Department will release its weekly jobless claims report. Most expect a flat reading or a slight decline in the latest reporting week. The release is unlikely to pose a threat to the market's bullish tone.
In futures, the September contract ended up 11/32 to 118.10.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday Up 4/32 at 100.01-100.02 to yield 3.84%. the 5 1/4% five-year note ended up 6/32 at 101.25-101.27 to yield 4.82%, the 5 3/4% 10-year note was up 13/32 at 101.29-101.31 to yield 5.49%, and the 61/4% 30-year bond was up 11/32 at 101.01-101.03 to yield 6.16%.
The three-month Treasury bill was down one basis point at 2.99%, the six-month bill was unchanged at 3.10%, and the year bill was down one basis point at 3.23%.
Treasury Market Yields Wednesday Week Month3-Month Bill 3.03 3.03 3.136-Month Bill 3.17 3.18 3.311-Year Bill 3.33 3.37 3.582-Year Note 3.84 3.94 4.203-Year Note 4.18 4.33 4.465-Year Note 4.82 5.01 5.187-Year Note 5.08 5.29 5.5110-Year Note 5.49 5.67 5.8730-Year Bond 6.16 6.25 6.64
