Treasury prices ended with tiny gains after a painfully slow trading session yesterday as the summer doldrums finally hit the bond market.
Late in the afternoon, the 30-year bond was 1/8 point higher and yielded 7.40%.
Many trading desks were thinly staffed as participants took summer vacation, and activity was also slowed because London financial markets were closed for a holiday.
Moreover, traders said participants are reluctant to push prices too far from current levels ahead of Friday's August employment report, which will set the market's direction for the coming weeks.
Early in the session yesterday, Treasury prices showed little reaction to a weaker than expected economic indicator.
The Commerce Department said sales of new homes fell 2.6% in July. It also revised its June report to show a 5.3% gain in sales rather than the 7.9% gain originally reported.
Economists had forecast a 3% increase to a 580,000 annual sales pace. Instead, July sales came in at a 563,000 rate.
Michael Moran, chief economist at Daiwa Securities America, said the results were disappointing.
Even though the Fed's rate cut in early July might not show up immediately, interest rates had begun to move lower even before July and home sales should have gotten some boost from that, Mr. Moran said.
"I think what may be happening is that even though interest rates are attractive right now, many individuals are holding back because of the sluggish job market or low consumer confidence," he said.
Mr. Moran noted, though, that the initial estimate of new home sales is often inaccurate.
Stephen Roach, a senior economist at Moran Stanley & Co., said he thought it was just a matter of time before home sales picked up, given the low mortgage rates available right now.
"In general, the housing sector has been an outstanding performer in an otherwise disappointing recovery," he said. "We've had about a year of powerful double-digit increases in residential housing construction."
Mr. Moran said Treasury prices initially moved higher on the home sales report.
"Then when the dollar weakened, the softness in the dollar pushed the bond market down," he said.
The bond market seemed to ignore yesterday's other indicator, the Chicago purchasing managers' index for August. The Chicago index fell to a seasonally adjusted 58.4% in August from 59.2% in July.
Michael Strauss, chief economist at Yamaichi International (America), said the Chicago report fit in with the market's expectation that today's National Purchasing Managers' report will show "some deceleration."
Traders said the market is keeping an eye on the dollar and especially on its relationship to the German mark.
Late yesterday, the dollar was quoted at 1.4027 marks, down from 1.4090 late Friday, and at 123 yen, which matched Friday's closing level.
"As long as it stays above 1.4 marks, we're okay," a bond trader said. "If it starts to crack that [level], then we'll see a different attitude."
Near the end of the day, Treasury prices moved a little higher.
"Between 2:30 and 3:30 [p.m.], we probably had the strongest move of the day, if you want to call it that," Mr. Strauss said.
Mr. Strauss said the afternoon gains reflected a small amount of buying, and he speculated that some participants were looking ahead to this morning's report on July leading indicators.
Some economists are forecasting a decline in July leading indicators. That would be the second decline in a row and contrast with the average increase of 0.5% during the first four months of the year, Mr. Strauss said. He is expecting the index to be flat.
A coupon trader said there was so little going on yesterday that it was hard to tell why prices moved: "We could just be seeing the day traders getting square on what they did earlier."
A note trader said he had seen buying in the five-year area during the day and agreed that some short-covering might also have occurred.
"I think you had some people who sold it in the morning," expecting the market to sell off, and they may have come in to reverse those traders when the retail buying gave the market a bid, the trader said.
There was some talk in the bond market yesterday about whether insurance companies will sell Treasuries to get the money they need to pay claims for Hurricane Andrew.
But Mr. Strauss said the insurers can get the cash more easily by other methods.
"They're continuously getting in premiums and they'll use that money to pay off claims," rather than buying Treasuries, he said. "They will become less frequent buyers over the next 30 to 60 days."
Insurance companies could also roll off maturing short-term instruments, or even borrow from a bank, Mr. Strauss said.
The September bond futures contract closed 5/32 higher at 105 5/32.
In the cash market, the 7 1/4% 30-year bond was 6/32 higher, at 98 1/32-98 5/32, 5/32, yield 7.40%.
The 6 3/8% 10-year note rose 5/32, to 98 8/32-98 12/32, to yield 6.60%.
The three-year 4 5/8% note was up 1/8, at 99 29/32-99 31/32, to yield 4.63%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 3.16%, the six-month bill off one basis point at 3.25%, and the year bill one basis point lower at 3.33%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.20 3.19 3.22
6-Month Bill 3.32 3.33 3.34
1-Year Bill 3.44 3.56 3.59
2-Year Note 4.13 4.21 4.38
3-Year Note 4.63 4.79 4.83
5-Year Note 5.57 5.70 5.81
7-Year Note 6.11 6.23 6.26
10-Year Note 6.60 6.68 6.70
30-Year Bond 7.40 7.44 7.44
Source: Cantor, Fitzgerald/Telerate