International events benefited the short end of the Treasury market yesterday, while developments at home hurt the long end.
The 30-year bond ended down 10/32, to yield 6.11%.
Short-dated paper rallied yesterday as political turmoil in Russia and a surge in the U.S. dollar created a flight to quality into Treasuries.
Foreign and domestic investors moved money into short-dated paper to shield themselves from volatility created by reports that Russian President Boris Yeltsin had disbanded parliament and called for elections in December.
Meanwhile, prices at the long end of the Treasury market plunged on strong economic news and on weakness in the futures market. "The short end of the market held in well as a safe haven from turmoil abroad, and the long end got ripped apart by weak technicals and data," said Matthew Alexy, senior market strategist at First Boston Corp.
Market analysts said news of Yeltsin's plan to disband the legislature gave the Treasury bill sector and the short coupons a bid.
Yeltsin's announcement was reportedly met with one from Russian Vice President Alexander Rutskoi that he planned to assume the powers of the President in accordance with the Russian constitution.
The U.S. dollar rose to 1.6360 against the German mark in reaction to events in Russia, compared with Monday's closing level of 1.6112
A solid two-year note auction lent further support to the front end of the market, participants said. Large buyers and strong bidding underpinned the Treasury's sale of $16 billion of two-year notes, which were awarded at 3.94% with a bid-to-cover ratio of 2.68.
A sharp sell-off in the futures market pounded the long end yesterday and pushed the yield on the 30-year bond higher. Selling carried over into the cash market when speculative players succeeded in pushing the December bond contract below the psychologically important 117 28/32 support level.
Declines in the futures market touched off a round of zero coupon bond selling, which accelerated the price declines. Traders speculated that the selling was related to Brazil's efforts to delay its debt restructuring.
Other factors hurting the long end of the market were a surge in housing starts and building permits for August and another increase in the Johnson Redbook weekly survey of retail sales activity.
"The bond ran into serious trouble with data, and for the next couple of days it will be fighting for its life," said Anthony Karydakis, senior financial economist at First Chicago Corp. "The path of least resistance for the bond is to the downside."
Housing starts rose 7.8% to a 1.32 million units rate in August, while permits rose 7.5% to a 1.25 million units rate. The market had been bracing for strong housing data this morning, but the numbers exceeded even the most optimistic estimates.
Steven Ricchiuto, chief economist at Barclays de Zoete Wedd Securities, said the report supports the view of some economists that third-quarter gross domestic product could come in surprisingly strong. He noted that most of the strength came in the single-family component of the report, as that is the most interest-rate sensitive sector of the overall housing market.
The Johnson Redbook survey showed that sales in September sales rose a hefty 2.6% through Sept. 18, stronger than the 2.0% reading in the previous week.
Tony Crescenzi, head fixed-income trader at Miller, Tabak, Hirsch & Co., said the report shows that the economy is not as weak as many in the market previously thought. He said recent sales data, coupled with other signs of strength in the economy, support his view that the market's long-term outlook has taken a turn for the worse.
"There are some compelling signs that the economy is coming back, and I think that the market's recent declines are a preclude to a much larger sell-off." Crescenzi said.
The yield curve steepening trend accelerated yesterday as curve trades sent the long bond lower for the sixth straight session. One reason for steepening of the curve yesterday was quarter-end window dressing, as fund managers booked profits at the long end of the curve and moved their money into the more stable shorter-dated Treasuries. The spread between the two-year note and the 30-year bond steepened eight basis points to 226.
In futures, the December contract ended down 31/32 to 117.15.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday up 3/32 at 100.00-100.01 to yield 3.85%. The 4 3/4% five-year note ended up 2/32 at 99.26-99.28 to yield 4.77%. The 5 3/4% 10-year note was down 1/32 at 102.06-102.10 to yield 5.44%. And the 6 1/4% 30-year bond was down 10/32 at 101.21-101.25 to yield 6.11%.
The three-month Treasury bill was up unchanged at 3.04%, the sixth-month bill was unchanged at 3.13%, and the year bill was down two basis points at 3.26%. Treasury Market Fields Prev. Prev. Tuesday Week Month 3-Month Bill 2.97 3.03 3.04B-Month Bill 3.13 3.16 3.171-Year Bill 3.36 3.36 3.342-Year Note 3.85 3.89 3.843-Year Note 4.17 4.20 4.205-Year Note 4.77 4.77 4.867-Year Note 4.98 4.97 5.1310-Year Note 5.44 5.38 5.5430-Year Bond 6.11 6.97 6.19 Source: Cantor, Fitzgerald/Telerate