Retail investors dumped Treasury security holdings yesterday because of worries about a Clinton presidency, and the selling pushed prices on all maturities sharply lower.
Short-and intermediate-term paper suffered the most, with the 10-year note off 1 3/8 point to yield 6.87% late in the day. The 30-year bond closed 7/8 point lower to yield 7.64%.
Treasury prices had declined Friday and Monday because of concerns that Democratic presidential candidate Bill Clinton, if elected, would spend so much in an attempt to stimulate the economy that the budget deficit would grow dramatically, which would end up increasing the amount of Treasury supply.
The upcoming Treasury auctions, beginning with next week's sales of two- and five-year notes, and the market's disappointment at not getting an easing from the Federal Reserve contributed to the price declines.
Traders and analysts said yesterday' sell-off was a continuation of the earlier declines, but was notable for the amount of retail selling that occurred. As prices fell, there were rumors that banks were selling short-term notes because loan demand had picked up.
A note trader said the candidates' final debate Monday night, in which President Bush improved his performance but did not manage to trounce Clinton, may have convinced more market participants that a Clinton victory is inevitable.
The trader said the market had been battered by "droves of selling," with an occasional brief period of price stability occurring when some participants bought securities to cover short positions.
"The negative psychology is getting out of control here," said Anthony Karydakis, a senior economist at the First National Bank of Chicago.
Karydakis said it was interesting that short-term securities had gone down more than the long end.
"You would think the prospect of a Clinton victory should have been of far more importance to the long end," he said. "But the front end seems totally bottomless. We keep making new lows."
Kathleen Camilli, chief economist at Maria Fiorini Ramirez Inc., said the bond market was becoming oversold by some measures.
The December eurobond contract has fallen in price to reflect a 50-basis-point tightening and the March contract shows traders expect the funds rate to have risen to 3 3/4 by that time, from the current 3% target, Camilli said. "Both of those [levels] we believe are unrealistic, given the economic fundamentals," she said.
"I think people are getting overly bearish on the prospect of a Clinton victory," she added. "Keep in mind it will be difficult for Mr. Clinton to get anything done in the first year of his presidency."
Some traders agreed that short-term prices were absurdly low, but said the market's bad mood had overwhelmed more rational considerations.
"It got to the point where levels and values didn't mean much because people were just trying to contain their losses," a short-term trader said.
"I think twos and fives are extremely cheap, but there is some real negative psychology out there and until it turns around people won't feel comfortable buying," a coupon trader said. He speculated the market's mood would improve in a few weeks, once the election and auctions are out of the way.
The short-term trader said he expects some kind of bounce, but not a big one. "We have to bid close to $90 billion of securities over the next 30 days," the trader said, as next week's twos and fives are followed by the quarterly refunding in early November and another round of twos and fives late next month.
"Rationally, one has to believe this move may be getting close to exhausting itself, given the ferocity of this decline over the last few days," Karydakis said. "But the market doesn't trade as if we're close to the bottom, it trades as if it's a one-way street. This is a market that just wants to go down."
The main event today will be the Treasury's announcement of next week's two- and five-week note auctions.
Most economists expect the Treasury to boost the two-year issue to $15 billion, up $500 million from last month's sale, and many think the Treasury will also increase the size of the five-year to $10.75 billion from the $10.5 billion sold last month.
In its preoccupation with politics and supply, the bond market ignored yesterday's economic news.
September starts rose 1.4% to a 1.256 million annual rate, while August's level was revised up to 1.239 million from the 1.237 million announced last week. The consensus forecast called for a small decline in starts, to a 1.20 million pace.
Stephen Gallagher, an economist at Kidder, Peabody & Co., said the small gain in September starts on top of August's 12.6% surge was "encouraging," especially since the Commerce Department said the gains were not caused by Hurricane Andrew. "We're finally seeing some of the results of the lower mortgage rates," he said.
But Martin Mauro, senior economist at Merrill Lynch & Co., said the improvement in starts was still not enough to signal a stronger rate of growth in the economy. "We're still not getting the level of increase we should be getting," he said.
The December bond futures contract closed 30/32 lower at 102 10/32.
In the cash market, the 7 1/4% 30-year bond was 27/32 lower, at 95 7/32-95 11/32, to yield 7.64%.
The 6 3/8% 10-year note fell 1 3/8, to 96 11/32-96 15/32, to yield 6.87%.
The three-year 4 5/8% note was down 21/32, at 99 8/32-99 10/32, to yield 4.88%.
Rates on Treasury bills were higher, with the three-month bill up 10 basis points at 3.04%, the six-month bill up 15 basis points at 3.25%, and the year bill 15 basis points higher at 3.46%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.08 2.88 2.97
6-Month Bill 3.32 3.08 3.02
1-Year Bill 3.58 3.19 3.18
2-Year Note 4.30 3.98 3.92
3-Year Note 4.88 4.43 4.44
5-Year Note 5.90 5.49 5.50
7-Year Note 6.45 6.06 6.03
10-Year Note 6.87 6.50 6.49
30-Year Bond 7.64 7.53 7.46
Source: Cantor, Fitzgerald/Telerate