Treasury note and bond prices posted small losses yesterday after a ho-hum two-year note auction and a big jump in grain prices.
Late in the afternoon, the 30-year bond was off 1/4 point to yield 8.48%.
The Treasury sold $12.5 billion of two-year notes yesterday afternoon, the second of four auctions to be held this week.
The two-year notes were sold at an average yield of 6.94% and will bear a 6 7/8 coupon, down from the 7.06% average and 7% coupon at last month's two-year sale.
The 6.94% yield was just what the market expected, and the results showed the bidding was neat, with only a small amount awarded at the high of 6.95%.
"It was a non-event," said Kevin Flanagan, a money market economist at Dean Witter Reynolds Inc.
On the other hand, the quantity of noncompetitive bids and the ratio of total bids to the size of the issue were both a little below average for a two-year auction, suggesting investors were not enthusiastic about the notes.
The weakness was surprising since the two-year is traditionally a strong auction, said Maureen O'Toole, director of research at Rodman & Renshaw. "It's almost as close to cash as one can get, so this could have been a little upsetting to the market."
Mr. Flanagan questioned how significant the below-average non-competitive bids and cover ratio were.
Small investors, who enter most noncompetitive bids, are sensitive to coupons and the noncompetitive bids might have been stronger if the coupon were 7% or higher, he said.
The weaker-than-normal cover ratio could show investors were waiting to buy five-year notes today, since the five-years yield about 100 basis points more than two-years, Mr. Flanagan said, or it might reflect skittishness about yesterday's auction given the recent talk of short squeezes.
Long-term prices eroded after the auction results were announced.
A government coupon trader said the uninspiring auction had caused some selling at the long end.
Participants disappointed that there was no follow-through buying after the results were announced "are selling the long end against paper they bought today, figuring they have the refunding as a back-stop," the trader said.
"It's a quiet and lethargic market, just sort of drifting under the weight of supply," he added.
Late yesterday, the price on the when-issued two-year notes had eroded and pushed the yield up to 6.95% from the 6.94% average at the auction.
Ms. O'Toole said the jump in grain prices was also ailing the long end.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 5.75 5.74 5.73
6-Month Bill 5.98 5.97 6.01
1-Year Bill 6.27 6.27 6.33
2-Year Note 6.87 6.85 6.88
3-Year Note 7.30 7.25 7.38
4-Year Note 7.45 7.43 7.57
5-Year Note 7.93 7.88 7.96
7-Year Note 8.16 8.11 8.18
10-Year Note 8.29 8.25 8.32
20-Year Note 8.43 8.44 8.50
30-Year Bond 8.48 8.44 8.50
Source: Cantor, Fitzgerald/Telerate
The heat wave and lack of rain sent soybean, corn, and wheat prices higher, and at the close the Commodity Research Bureau index had gained 2.17 points, at 211.93.
The CRB index had risen more than a point Monday, also on higher grain prices.
"People are afraid of the potential for a weather market in the grains," Ms. O'Toole said. "The longer we go without rain, the more intense those fears become."
She acknowledged that many analysts exclude volatile food prices when they analyze inflation rates.
But Ms. O'Toole said the market was particularly sensitive to inflation news right now, given its importance for long-term rates and also desperate for any information in the lethargic summer markets.
"We're searching for things to trade off," she said.
The September bond future contract close 11/32 lower at 93 9/32.
In the cash market, the 30-year 8 1/8% bond was 1/4 lower, at 95 30/32-96 2/32, to yield 8.48%.
The 8% 10-year note fell 5/32, to 97 29/32-98 1/32, to yield 8.29%.
The three-year 7% note was down 1/16, at 99 5/32-99 7/32, to yield 7.30%.
In when-issued trading, the five-year note to be auctioned today was quoted at 7.93%.
Rates on Treasury bills were mixed, with the three-month bill unchanged at 5.60%, the six-month bill two basis points higher at 5.74%, and the year bill up three basis points at 6.27%.