Retail purchases of intermediate securities rescued the Treasury market after it sold off early in the session yesterday.
By late in the afternoon, prices were unchanged to slightly higher, with the 30-year bond up 1/2 point on the day, and 1/2 point above the session lows, to yield 7.91%.
Prices began to slide as New York traders came in, when dealers lightened up ahead of the release of the August industrial production report.
The market was also disappointed by remarks by Federal Reserve Governor Wayne Angell.
Mr. Angell said in a television interview yesterday morning that the recession was over and the Fed eased last week in recognition of the improvement in inflation.
Maureen O'Toole, director of research at Rodman & Renshaw, said the market had thought the Fed had eased in response to the faltering economic recovery and weakness in money supply growth, as well as the improvement in inflation.
"When he said it was because of inflation, not economic weakness, that made people nervous," Ms. O' oole said.
When the better-than-expected 0.3% rise in August output failed to help the market, long-term prices fell further, but the market managed to turn around when retail investors started buying, traders said.
The hottest part of the yield curve seemed to be intermediate secuties, and traders said the interest in intermediate paper showed investors were continuing to extend the maturity of their holdings.
"The maintenance are outperforming the long end and the short end," a government bond trader said.
The head of a trading desk said yesterday's small gains were just part of a long trend toward lower rates and higher prices, as the market responds to lackluster economic growth, weak money supply statistics, and easier Fed monetary policy.
"The momentum is slow and steady and consistent," he said.
And Ms. O'Toole said the trend upward "can last until we receive some real compelling evidence to the contrary, which would have to come in the form of real fear that inflation was back, from a source viewed to be permanent, and that the consumer was back whipping things off the shelves."
She said the industrial production number had little effect on the market since participants are already aware of the improvement that has taken place in the manufacturing sector.
Although industrial output rose only 0.3% in August, less than the 0.5% gain the market had expected, analysts said the report was stronger than it looked on the surface, and confirmed that the recovery in manufacturing was continuing.
Part of the strength showed up in revisions to previous months. July's
Treasury Market Yields
Tuesday Week Month
3-Month Bill 5.32 5.37 5.25
8-Month Bill 5.44 5.46 5.35
1-Year Bill 5.52 5.56 5.44
2-Year Note 6.14 6.18 6.12
3-Year Note 6.44 6.52 6.54
4-Year Note 6.59 6.67 6.71
5-Year Note 7.07 7.18 7.21
7-Year Note 7.39 7.51 7.58
10-Year Note 7.59 7.71 7.79
20-Year Bond 7.84 7.94 8.04
30-Year Bond 7.94 8.00 8.08
Source: Cantor, Fitzgerald/Tolerate
gain was revised up to 0.6% from the 0.5% reported last week, and there were also upward revisions in May and June.
And the August statistics showed bigger-than-expected gains in the output of consumer goods, which were offset by an unexpected decline in auto production.
Dan Seto, an economist at Nikko Securities, said the production of consumer goods excluding autos rose 0.9% in August, while some sectors, such as clothing, chemicals, and paper products, posted gains of more than 1%.
The upturn in output doesn't jibe with recent reports that consumer spending is hampered by lackluster income growth and higher taxes and that businesses are proceeding cautiously, Mr. Seto said. "The strength in production of consumer goods indicates more optimism than had been previously reported."
Analysts said the Fed's aggressive add job yesterday with overnight system repurchase agreements was just an attempt to counter the draining effects of this week's corporate tax payments and had no policy significance.
The December bond future contract closed 5/32 higher at 98 28/32.
In the cash market, the 30-year 8 1/8% bond was 5/32 higher, at 102 10/32-102 14/32, to yield 7.91%.
The 7 7/8% 10-year note rose 5/32, to 101 28/32-101 28/32, to yield 7.59%.
The three-year 67% note was up 1/32, at 101 2/32-101 4/32, to yield 6.44.
Rates on Treasury bills were mixed, with the three-month bill steady at 5.19%, the six-month bill up one basis point at 5.23%, and the year bill one basis point lower at 5.25%.
Today's news includes August housing starts, the Fed's beige book, and the Treasury's announcement of next week's two-and five-year note auctions.
July housing starts are expected to decline 0.9%, to a 1.06 million annual rate. Ms. O'Toole said if housing starts moved below 1 million, "the market would take that very favorably."