Long-term Treasury prices added to their gains Friday as the market consolidated in the wake of Thursday's successful 30-year bond auction.
Late in the afternoon, the new 8% 30-year bond was up 3/8 to yield 7.87%, while short-term notes were closing slightly lower.
The bond auction was unexpectedly popular, especially in the wake of the sloppy three-year and 10-year auctions earlier last week.
The long end of the market shot a point higher after the bond auction results were announced, and it improved even more Friday morning.
"The 30-year auction certainly was encouraging," said Gary Schlossberg, senior economist at Wells Fargo Bank.
"There was some concern that the steep yield curve was telling us the market was looking for a bottom in rates sooner rather than later," Mr. Schlossberg said. "But given the bond auction [Thursday] and the rally in the market, it could be that it was supply that was weighing on the market."
Traders said Friday's gains at the long end reflected a combination of retail buying and short-covering by dealers who missed getting the bonds they needed at Thursday's auction.
With longer-term paper back in favor, traders said retail investors were going back to the practice of moving money out along the yield curve by selling short-term notes and buying 10-year or 30-year paper.
"People were a little under-invested, especially in longer duration stuff," a government coupon trader said. "They're fighting for yield, and the only place you can go for a big pickup in yield is the long end."
But a government note trader was skeptical of the notion that retail investors were moving all the way out to the long bond.
"Nobody wanted the things for the last two months, and now that the auction went well, everybody wants to buy them?" he asked.
Treasury Market Yields
Friday Week Month
3-Month Bill 4.74 4.87 5.08
6-Month Bill 4.86 4.95 5.20
1-Year Bill 4.93 5.00 5.28
2-Year Note 5.60 5.62 5.88
3-Year Note 5.95 5.91 6.14
4-Year Note 6.04 6.05 6.31
5-Year Note 6.65 6.71 6.81
7-Year Note 7.06 7.13 7.16
10-Year Note 7.40 7.46 7.45
15-Year Bond 7.71 7.76 7.73
30-Year Bond 7.87 7.93 7.88
Source: Cantor, Fitzgerald/Telerate
The trader suggested dealer short-covering was the major factor in the run-up at the long end. Dealers "missed it and they've run the market up, but I'm not sure you've gotten any real investors to come in and buy bonds here."
The long end made all its gains by early in the New York session, and during the course of the morning gave back about half as some participants decided to sell securities to take profits.
The only news Friday, the release of the minutes from the Federal Open Market Committee's October meeting, had no effect on prices. As expected, the minutes showed Fed policymakers had voted to maintain a bias toward easier credit.
But traders and analysts said the outlook for the bond market was favorable.
"Uncertainty about where fiscal policy is going is a big impediment and the uncertainty about the motiviation behind Fed policy lately is an impediment," said Douglas Schindewolf, a money market economist at Smith Barney Harris Upham. "But two very important positives remain in place: the economy is soft, and therefore poses a non-threatening background for inflation, and there's going to be a continuation of the need to reach along the yield curve for yield."
This week's indicators are also expected to be a help to the market. Economists expect another set of moderate increases in October consumer and producer prices.
And Kevin Logan, chief economist at Swiss Bank Corp., said the small decline he expects in October retail sales may be even more of a plus for the market.
"What's really important at this stage is that consumer spending carry the economy, since we're really not seeing much strength in exports or government spending or investment spending or construction," Mr. Logan said. "That leaves the stalwart consumer to keep things moving."
But he thinks that last month, the stalwart consumer faltered and retail spending actually declined 0.2%, following the 0.7% increase in September.
The December bond future contract closed 13/32 higher at 100 9/32.
In when-issued trading, the 30-year 8% bond was 5/16 higher, at 101 10/32-101 14/32, to yield 7.87%.
The when-issued 7 1/2% 10-year note rose 1/32, to 100 17/32-100 21/32, to yield 7.40%.
The when-issued three-year 6% note was down 1/32, at 100 2/32-100 4/32, to yield 5.95%.