The Treasury market took its lumps but managed to end yesterday's session unchanged to slightly lower yesterday in thin trading.
The 30-year bond ended the session unchanged, to yield 6.66%.
Overall, the market traded on a weak note yesterday as participants embraced the fact that economic fundamentals are on the rise and that interest rates will soon follow.
A late afternoon short-covering rally managed to elevate the market back to opening levels but failed to have a positive impact on the market's fragile tone.
Notes and bonds opened the session on firm footing as Japanese investors were once again better buyers of long-dated paper in overnight trading. However, interest did not translate into significant gains as buying tapered off at the start of trading in London.
Prices ground lower throughout the New York session as the market reacted to a couple of reports that were bearish for the market and a tepid response to the first round of the Treasury Department's note auctions this week.
"The economy will be better in the second quarter of the year and the market has realized that it will lead to a tightening of policy," said Donald Fine, chief market analyst at Chase Securities.
Economic statistics have turned a shade more positive in recent sessions and cast an element of sobriety into the market. Federal Reserve Board Chairman Alan Greenspan made it clear last week that the central bank's next move will be a tightening of monetary policy, and he faced the market with the arduous task of factoring in higher interest rates down the road.
The Fed's plan to scrap the money supply numbers as a key barometer of overall activity has pushed economic numbers onto center stage.
Of the indicators, inflation remains the biggest culprit. The market had reacted favorably Monday to indications that commodity prices were moderating and reports that weather in the Midwest was drying up.
However, the Labor Department helped refuel inflation fears when it reported a larger-than-expected advance in its employment cost index for the second quarter. Compensation for U.S. workers rose 0.9% on a seasonally adjusted basis in the second quarter, surprising most market participants who had factored in an increase of 0.6%.
The market also got some bad news from the Conference Board Tuesday, which released its monthly reading on consumer sentiment. While the overall consumer confidence index weakened slightly to 57.7 in July and was initially interpreted as good news for the market, participants found the detail of the report more disturbing than the headlines.
The present situation index rose sharply in the month, to 46.1 from 42.1. The index, which has been in a declining trend since April, created some selling pressure across the yield curve.
"The consumer confidence numbers were bad for the market, " said Michael Strauss, chief economist at Yamaichi Securities. "The present conditions figure is the only part of the report that has a direct bearing on the economy, and this increase is a cause for concern."
On the supply side of the market, prices received no help from the two-year note auction. The Treasury's auction of $16 billion in two-year notes was awarded at 4.26%, with a bid cover ratio of 2.25%.
Most market observers believed that -- at 125 basis points over funds -- the issue would attract respectable interest and be awarded at or below 4.25%. But retail demands never materialized and the Street was left holding the bag.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.14 3.11 3.086-Month Bill 3.34 3.27 3.201 -Year Bill 3.59 3.44 3.432-Year Note 4.19 4.07 3.993-Year Note 4.50 4.35 4.315-Year Note 5.22 5.06 5.037-Year Note 5.54 5.38 5.391 0-Year Note 5.89 5.73 5.7630-Year Bond 6.67 6.55 6.66Source: Cantor, Fitzgerald/Telerate
"It seems dealer shorts accounted for much of the sale," said Stephen A. Maher, head of fixed income trading at Nikko Securities.
The market still has a number of hurdles to clear this week, including the durable goods orders report for June, the five-year note sale, and the preliminary report on second-quarter gross domestic product.
"The market is fragile and investors are not prepared to step up to the plate ahead of the data and supply this week," said Anthony Karydakis, senior financial economist at First Chicago Capital Markets Inc. "We're searching for a bottom around these levels."
The market's next objective, Karydakis added, is today's five-year note auction, which he asserted is the next test of the market's ability to hold its own.
Neal Soss, chief economist at First Boston Corp., cautioned that the market may go into the five-year note sale wary of how the issue has performed in recent auctions. "The five-year has come in all over the place this past year and people will remember that," he said.
However, the when-issued five-year note performed relatively well through yesterday afternoon and could prove to be the wild card of this week's trade.
"The five could attract good interest because of where they're trading relative to past auctions," one head trader said.
In the cash markets, the 4 1/8% two-year note was quoted late yesterday down 1/32 at 99.27-99.28, to yield 4.19%; the 5 1/8% five-year note was unchanged at 99.16-99.18 to yield 5.22%; the 6 1/4% 10-year note was up 1/32 at 102.17-102.19 to yield 5.89%; and the 7 1/8% 30-year bond was unchanged at 105.24-105.26 to yield 6.67%.
In when-issued trading, the five-year note, to be auctioned today, was quoted unchanged at 5.25%. The three-month Treasury bill was unchanged at 3. 1 0%; the six-month bill was two basis points higher at 3.26%; and the year bill was up one basis point at 3.47%.