Favorable economic news pushed short-term Treasuries higher yesterday, but bond prices continued to trail the rest of the market, weighed down by worries about the presidential election and the dollar.
Late yesterday afternoon, the 30-year bond was just 1/32 point lower and yielded 7.67%, while short-term notes were up as much as 1/4 point.
The entire Treasury market rallied yesterday morning when the June retail sales and consumer price reports showed slow growth and low inflation, the best possible combination for bonds.
But the long end soon gave back its early gains.
Traders said a number of problems are scaring investors away from long-term Treasuries.
Investors do not like the uncertainty about the outcome of the U.S. presidential election, traders said. A more immediate concern is the dollar, which could suffer further damage if the Bundesbank decides to raise rates tomorrow. A weak dollar would discourage foreign investors from buying Treasuries.
As the long end has faltered in recent sessions, traders say they have seen increasing amounts of money being moved to short-term securities from the long end.
"The front end has always been a safe haven," a government coupon trader said. "Now, it's also a home for people coming in the curve."
"We've seen people coming into the front end defensively," the trader added.
At the same time, the extremely low rates on Treasury bills are pushing people who would usually buy bills out into short-term notes.
"It's an extension trade on the flight to quality," a note trader added. "They're extending out from three-month bills, the traditional haven, just because the rates are so incredibly low."
The biggest beneficiary appears to be short-term notes maturing in two to five years.
Steven Wood, director of financial markets research at Bank of America, said investors moving out the curve were reluctant to go beyond five years because they wanted to be positioned for any future easing in Federal Reserve monetary policy.
"One of the things people are beginning to recognize is that if there is any further downward movement in rates out of the Fed, almost all the benefit is going to be at the short end," Mr. Wood said. "The curve will steepen even further."
There were reports yesterday that a large account sold bonds to buy five-year notes, exemplifying the trend of money moving in the curve.
Traders said the global offering of $1 billion of 10-year notes to be priced today by Matsushita Electric may have added to the pressures on the long end.
As short-term prices outpaced the long end, the yield curve steepened more. Late yesterday, the 30-year bond was yielding 340 basis points more than the two-year note, up from the 333-basis-point spread late Monday and the 285-basis-point spread a month ago.
Yesterday's indicators confirmed that the economic fundamentals are still working in the bond market's favor.
June consumer prices rose 0.3% and the core rate of inflation, excluding food and energy costs, was up 0.2%.
June retail sales rose 0.5%, with a 1.7% jump in automobile sales responsible for much of that increase. May's sales were revised to a 0.4% gain from the 0.2% increase reported last month.
Most of the numbers matched the market's expectations, but the sales report did include one better-than-expected number. Excluding autos, June retail sales rose only 0.1%, when the consensus forecast called for a 0.3% gain.
David Wyss, chief financial economist at DRI/McGraw-Hill, said the two pieces of economic news were related.
"The reason there's no sign of inflation is there's no sign of growth," he said.
"We've been relying on the consumer to carry this economy for the last decade, and the consumer is getting tired," Mr. Wyss added. "Employment growth is slow, income growth is slow, and without income, it's hard for Americans to spend."
Also yesterday, auto manufacturers' sales for early July came in at a 6.5 million annual rate, down from the 7.5 million pace in late June.
Today's economic numbers, June industrial production, and May business inventories, are not expected to have much impact on Treasury prices.
The consensus forecast is for a 0.2% increase in business inventories and a 0.4% decrease in June industrial output. But analysts said the weakness in production was foreshadowed by the weak June employment statistics and would be old news for the bond market.
The September bond futures contract closed 1/32 lower at 101 31/32.
In the cash market, the 30-year 8% bond was 1/32 lower, at 103 19/32-103 23/32, to yield 7.67%.
The 7 1/2% 10-year note rose 1/16, to 103 22/32-103 26/32, to yield 6.95%.
The three-year 5 7/8% note was up 7/32, at 102 25/32-102 27/32, to yield 4.78%.
In when-issued trading, the 6 3/8% seven-year note was 9/32 higher, at 99 17/32-99 21/32, to yield 6.43%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.26%, the six-month bill off four basis points at 3.28%, and the year bill four basis points lower at 3.42%.