Holiday cheer was in short supply yesterday as the market tackled the first of this week's round of Treasury auctions.
Prices ended narrowly mixed, with the 30-year bond closing down 2/32, to yield 6.30%.
The Treasury Department's sale of $28 billion in notes has brought out the Scrooge in most players this week. Amid signs that the U.S. economy is building strength and fears of higher interest rates, participants looked upon fresh supply about as favorably coal in their Christmas stockings.
Still, two-year note sale yesterday went relatively well as dealers gladly covered short positions for the issue, which backed up more than seven basis points ahead of the auction deadline. The $17 billion in two-year issues were awarded 4.25%, and the market recovered much if its early losses on the results, which gave the front end of the market a much needed bid.
But ahead of the five-year sale the market was unimpressed by the results, and Treasuries traded heavily across the yield spectrum as few buyers emerged. Players are approaching today's auction of $ 11 billion in five-year issues cautiously because the intermediate sector of the curve has been a tough sell in recent weeks. Complicating the outlook for the five-year is the fact that most large accounts have closed their books for the year and will not be bidding today.
"It's a supply trade this week, and the burden of new paper is pushing the market lower," said Fred Leiner, senior market strategist at Continental Bank.
Market observers believe the five-year sale win set the tone for trading into yearend. The real question for today's auction is where demand will come from. Most participants believe the five-year will be a Street auction and will attract a tepid amount of interest from other buyers, such as banks or retail accounts.
Banks - historically large buyers of intermediate paper - have begun to lend money again and are investing less of their holdings in the Treasury market. Lackluster demand is also expected from players on the buy-side of the market, as many have closed their books for the year.
"Important sources of sponsorship are avoiding the market and [that] could hurt the five-year sale," Leiner said.
Investors' ability to absorb supply, traders said, will be abetter gauge of the health of the market than the economic statistics due out this week.
That was evident in the market's lackluster response to news that retail sales for the third week of December were down 1.7% from the November level. The Johnson Redbook survey decreased by 1. 6% m the second week of December.
Marilyn Schaja, money market economist at Donaldson. Lufkin & Jenrette Securities Corp., said that while the market will keep an eye on this week's reports, stronger growth in the fourth quarter has already been factored into Treasury prices. "I don't think we'll see big reaction to any of the numbers," she said.
Reports due out this week include the final revision on third quarter gross domestic product, November durable goods orders, November personal income and consumption, and initial jobless claims.
November Budget Deficit
The Federal Government incurred a $38.4 billion deficit in November, compared to a $32.9 billion deficit last November, The Treasury reported. This brings the total deficit in the first two months of the new fiscal year to $83.8 billion, up slightly from a $81.5 billion deficit in the first two months of the last year.
Outlays in November were $121.5 billion, up from $107.4 billion last November. Government receipts totaled $83.1 billion in November, up from $74.6 billion a year ago. Interest in public debt in November was $22.3 billion, bringing the total in the first two months of the fiscal year to $39.9 billion. In the first two months of last year, interest on public debt totaled $40.5 billion.
In futures, the March bond contract ended down 3/32 to 114.14.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday unchanged at 100.02-100.03 to yield 4.19%. The 5 1/8% five-year note ended unchanged at 99.21-99.23 to yield 5.18%. The 5 3/4% 10-year note was down 1/32 at 99.14-99.18 to yield 5.80%, and the 6 1/4% 30-year bond was down 3/32 at 99.05-99.09 to yield 6.30%.
The three-month Treasury bill was up two basis points at 3.08%. The six-month bill was unchanged at 3.27%, and the year bill was also unchanged at 3.47%.TreAsury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.12 3.09 3.126-Month Bill 3.32 3.34 3.271-Year Bill 3.59 3.61 3.462-year Note 4.19 4.23 4.183-Year Note 4.52 4.55 4.515-Year Note 5.18 5.18 5.117-Year Note 5.33 5.35 5.3310-Year Note 5.80 5.80 5.7830-Year Bond 6.30 6.29 6.29 Source: Cantor, Fitzgerald/Telerate
