Long-Term Treasury prices closed lower yesterday, with the 30-year bond off 3/8 point to yield 7.81%, after being hit with a wave of retail selling late in the session.
There were reports of good-sized domestic selling at the long end, as well as rumors that Japanese investors were selling strips.
Although the sell-off occurred just as the Bush administration released its proposals for dealing with the credit crunch yesterday, traders said the two events were not connected.
The proposals, especially a change in the way bank capital regulations treat preferred stock, are intended to encourage bank lending. In theory, that should be good for the economy and bad for long-term Treasury prices.
But traders blamed the late-day selling on investors' setting up for today's seven-year auction or said it showed the weak close in the futures market made some investors nervous.
Participants said they were too busy responding to the sell-off to have time to analyze the proposed credit-crunch remedies. "We can't make head nor tails of them," the head of a government trading desk said.
While the long end faltered, the short end showed some spirit, and bills and short-term notes ended with small gains.
Many participants say the Fed is on the verge of easing its funds target again in the wake of Friday's lackluster employment report, and those expectations bolstered short-term prices.
Joseph Liro, a money market economist at S.G. Warburg & Co., said the solf funds rate yesterday supported those hopes. The funds rate closed at 5 1/8%, below the Fed's current target of 5 1/4%.
"That gave most of the short players increased confidence that the Fed will soon be targetting a 5%
Treasury Market Yields
Tuesday Week Month
3-Month Bill 5.13 5.23 5.37
6-Month Bill 5.24 5.33 5.46
1-Year Bill 5.30 5.39 5.56
2-Year Note 5.88 5.97 6.18
3-Year Note 6.13 6.19 6.52
4-Year Note 6.32 6.38 6.67
5-Year Note 6.81 6.87 7.18
7-Year Note 7.16 7.21 7.51
10-Year Note 7.42 7.42 7.71
15-Year Bond 7.71 7.69 7.94
30-Year Bond 7.81 7.79 8.00
Source: Cantor, Fitzgerald/Telerate
funds rate," Mr. Liro said.
He added that the weakness in funds probably showed banks are holding off biding in hopes of getting funds cheaper after the weekend.
Earlier in the day, Treasury note and bond prices dipped at midday after the Fed indicated it had not made any change in monetary policy.
During the early part of the day, activity was light, and traders said they expected the market to remain quiet all week.
"There's really nothing going on," a note trader said. "There's nothing to trade off of."
That situation will continue at least until tomorrow, when the market gets jobless claims and money supply numbers.
By Friday, when the September retails sales and producer price reports are released, traders said activity may be subdued ahead of the long holiday weekend. The cash Treasury market will be closed Monday in honor of Columbus Day.
No one seems worried about today's sale of $9.25 billion of seven-year notes. Retail investors' propensity to move money out the curve should ensure good interest in the issue, traders said.
Late yesterday, the when-issued notes were bid at 7.18%.
The December bond future contract closed 9/32 lower at 100 4/32/
In the cash market, the 30-year 8 1/8% bond was 3/8 lower, at 103 12/32-103 16/32, to yield 7.81%.
The 7 7/8% 10-year note fell 9/32, to 103-103 4/32, to yield 7.42%.
The three-year 6 7/8% note was up 1/32, at 101 27/32-101 29/32, to yield 6.13%.
Rates on Treasury bills were lower, with the three-month bill down three basis points at 50.1%, the six-month bill off three basis points at 5.05%, and the year bill three basis points lower at 5.04%.
Analyst Suggests Less Bonds
In the dull activity that made up yesterday's session, long-term traders passed the time duscussing an analyst's suggestion that the Treasury should cut back on the issuance of long-term debt.
Ward McCarthy, a managing director at Stone & McCarthy Research Associates, argued in a report that if the government issued less long-term paper, it would drive up bond prices and lower long-term interest rates, thus benefiting the economy.
"It makes sense for them to do something like this," Mr. McCarthy said. "If they could succeed in over-coming the fiscal irresponsibility of Congress, which is the primary reason, in my opinion, long-term rates have not fallen, everybody could benefit."
Lower rates would be good for the housing market and possibly encourage capital expenditures, he said.
Recall of 20-Years Possible
The Treasury Department is considering a recall of 20-year bonds, a Treasury official said.
"We're looking at it but we haven't made any decision, "the official said.
A decision must be made by tomorrow in order to place a formal notice in the Federal Register by Oct. 15, the official said.
Any decision to recall the bonds could set a precedent for redeeming other callable bonds with high interest rates.
R.H. Wrightson & Associates, Inc. estimates there are $70 billion in outstanding callable Treasury bonds in the hands of the public.
Of these, about $55 billion have coupons in excess of 10%, according to the firm's analyst, Lou Crandall.
Washington staff reporter Stephen A. Davies contributed to this column.