Some good inflation news and a decent 10-year note sale finally lured retail investors back into the Treasury market yesterday.
Late in the day, the 30-year bond was up 3/4 point to yield 7.66% and note prices were 1/8 to 3/4 point higher.
"It's just a case of a bunch of money moving into the market," a government bond trader said. "Sometimes you need supply to draw in the interest."
Prices began to rise yesterday morning when October producer prices rose less than expected. The producer price index increased only 0.1% last month, instead of the 0.3% gain the market expected.
The core rate, minus food and energy costs, was even more impressive: it actually declined 0.1% when the consensus forecast called for a 0.2% gain.
Michael Strauss, chief economist at Yamaichi Securities, said the bond market was actually slow to respond to the favorable implications of the producer price report.
"But as the day wore on and retail looked at things, some money went to work at the 10-year auction," he said.
Traders and analysts said the gains also showed the market was beginning to realize its worries about President-elect Bill Clinton were exaggerated.
"People are now realizing Clinton won't do anything drastic, and with inflation low, they're going ahead and testing lower yields," said Maureen O'Toole, director of research at Rodman & Renshaw Inc.
Strauss said he thought the market was still worrying about what Clinton might do, "but those fears are overblown. Fundamentally, the market is cheap.
"It's the kind of market that two weeks from now, people will wonder what happened to this paper," he added.
The results of yesterday's sale of $11.25 billion of 10-year notes showed there was good demand for the securities, although the auction detail caused a temporary setback in prices because the market's expectations for the sale were so high.
The reopened 6 3/8% 10-year notes were sold at an average yield of 6.93%, with dealers who bid 6.94% getting 14% of what they requested.
The nots had been trading at 6.92% when bids were submitted, but after the auctions, rumors circulated of a bullet bid at 6.93%.
Traders who were worried that they may have missed the auction drove the yield on the notes as low as 6.89% in the lull before the results were released.
When the results showed the sale had tailed back to 6.94%, prices came off their highs, with the when-issued notes bouncing back to 6.93%.
Traders said some of the auction details showed retail interest was not immense. Noncompetitive bids totaled only $393 million, which is below average for a 10-year sale, and 97.4% of the securities went to the New York district.
The Treasury market got a second wind late yesterday, thanks in part to the Johnson Redbook report on department store sales. According to the report, sales in early November showed no improvement from their level in early October.
Traders said the continuing weakness in commodity prices, and especially in metals, was also a plus for the market. The Commodity Research Bureau index dropped below 200 yesterday, falling .59 point to 199.51.
By late in the afternoon, the price on the when-issued 10-year notes had risen enough to push the yield down to 6.88%.
In other news, a group of Treasury market participants said their preliminary observations of the government's current dutch auction experiment with two-year and five-year note sales showed mixed results.
The Treasury Borrowing Advisory Committee of the Public Securities Association said it was still too early to tell whether the use of the dutch auction, or single-price method, is a success, according to the minutes of its meeting on Nov. 3 and Nov. 4.
In a letter that was released along with the minutes, Morgan Stark, chairman of the committee, told Treasury Secretary Nicholas Brady that it was not clear whether the government was saving money with the new method, "with some believing the recent two-year likely will save the Treasury a few basis points, while the prior five-year may have cost the Treasury a like amount."
The amount of late trading and market liquidity just before the auction appears to have diminished, and there seems to be greater uncertainty over the stop price, Stark said in his letter.
The December bond futures contract closed 7/8 higher at 102 15/32.
In the cash market, the 7 1/4% 30-year bond was 25/32 higher, at [95 1/32-95 5/32, to yield 7.66%.
The 6 3/8% 10-year note rose 23/92, to 99 16/32-99 17/32, to yield 6.86%.
In when-issued trading, the three-year 5 1/8% note was up 6/32, at 100 3/32-100 5/32, to yield 5.06%, down from the 5.17% average yield at Monday's auction.
The when-issued 30-year bond to be sold tomorrow was bid at 7.65%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.08%, the six-month bill down three basis points at 3.28%, and the year bill three basis points lower at 3.45%.