Short-Term Paper Performs Best As Traders Prepare for an Easing
Short-term Treasuries outperformed the long end of the market yesterday as some investors shifted money toward the front end in anticipation of an easing in Federal Reserve monetary policy.
But the price moves were small and activity was muted since most participants were already positioned for today's September employment report, traders said.
Late in the day, short-term notes were up about 1/8 point, while the 30-year bond was 1/8 point lower to yield 7.83%.
At the New York opening, prices were higher across the board because an article in yesterday's Wall Street Journal reaffirmed the market's easing hopes.
According to the Journal, Fed policymakers worried about the sluggish growth of the money supply gave Chairman Alan Greenspan the go-ahead to ease policy again at Tuesday's Federal Open Market Committee meeting.
"Apparently they have given him the green light and that gave a sense of imminency" to the Treasury market, said Anthony Karydakis, senior financial economist at the First National Bank of Chicago.
The bond market also liked yesterday's jobless claims, which fell only 10,000, to 430,000, when economists had forecast a decline of 15,000 jobs or more.
The short end performed well all day, but by midday the long end had given back its early gains and during the afternoon, long-term prices posted small losses.
Traders said the deterioration at the long end showed some profit-taking ahead of the jobs data and showed participants were taking off curve-flattening trades in anticipation of a Fed ease.
Earlier in the week, some participants had bet the yield curve would flatten by buying long-term securities and establishing short positions at the short end.
But if the Fed eases, "the front end will benefit the most, so you got the unwinding of some of those curve-flattening trades," Mr. Karydakis said. "That's why the long end is a little weaker and the front end is firm."
Yesterday afternoon, Treasury bills got a further boost from a rumor that the Federal Reserve would allow banks to count Treasury bills toward their reserve requirement.
That rumor was later denied by the Fed, but the bill sector had no time to be disappointed, since the Fed's statement came out just as another branch of the Fed reported another week's worth of dismal money supply statistics.
A spokesman for the New York Fed reported at the weekly press briefing that the nation's M1 money supply rose $1.2 billion to $870.7 billion in the week ended Sept. 23; the broader M2 aggregate fell $3 billion, to $3.4 trillion, and M3 fell $6.8 billion, to $4.1 trillion, in the same period.
Economists had expected M2, the most closely watched measure, to gain $1 billion to $2 billion. The poor performance by M2 gives Fed policymakers another motive for easing today.
Yesterday's car sales figures for late September were much stronger than expected, but the Treasury market paid little attention.
Traders hope the Fed will ease if nonfarm payrolls show a gain of 30,000 jobs or so, in line with the consensus forecast.
But the forecasts range broadly, with the low call for a 65,000-job decrease and the high prediction for an 85,000 increase.
The December bond future contract closed 1/8 lower at 99 24/32.
In the cash market, the 30-year 8 1/8% bond was 5/32 lower, at 103 5/32-103 9/32, to yield 7.83%.
The 7 7/8% 10-year note was unchanged at 102 23/32-102 27/32, to yield 7.46%.
The three-year 6 7/8% note was up 3/32, at 101 22/32-101 24/32, to yield 6.19%.
In when-issued trading, the seven-year note to be auctioned next Wednesday was bid at 7.24%.
Rates on Treasury bills were lower, with the three-month bill down seven basis points at 5.02%, the six-month bill off six basis points at 5.09%, and the year bill six basis points lower at 5.07%.
Also, for the week ending Wednesday, the federal funds rate averaged 5.33%, a bit higher than the 5.29% average the previous week, according to the New York Fed.
Freddie Mac Fines Dealers
The Federal Home Mortgage Corp. said yesterday it will impose penalties, including fines, on Wall Street firms that inflated customer orders or falsified information when bidding for its debt securities.
Each offending dealer will be put on probation for one year and will pay Freddie Mac 20% of the commissions it earned on selling the agency's debentures in 1990 and 1991, Freddie Mac said.
If the dealer commits any further violation of Freddie Mac's rules, it will be expelled from the dealer group.
There are 25 firms in the group that distributes Freddie Mac's debt securities. A spokesperson said agency officials have previously testified that 18 of the firms had admitted to inflating orders.
Treasury Market Yields
Thursday Week Month
3-Month Bill 5.14 5.27 5.48
6-Month Bill 5.29 5.37 5.60
1-Year Bill 5.33 5.45 5.71
2-Year Note 5.93 6.04 6.32
3-Year Note 6.19 6.28 6.68
4-Year Note 6.36 6.50 6.79
5-Year Note 6.86 7.00 7.34
7-Year Note 7.22 7.34 7.65
10-Year Note 7.46 7.54 7.83
20-Year Bond 7.72 7.78 8.04
30-Year Bond 7.83 7.88 8.09
Source: Cantor, Fitzgerald/Telerate