Treasury prices inched higher yesterday even though a couple of indicators provided the market with more evidence of economic weakness.
The market's gains were limited because investors are wary of making big bets ahead of this week's key indicator, Friday's June employment report.
"The employment report is clearly more important than all the other economic numbers combined," said Steven Wood, director of financial markets research at the Bank of America. "Nobody wants to get optimistic or pessimistic about the economy until they see those numbers."
Late yesterday, the 30-year bond was off 1/32 to yield 6.66%, while notes were as up as much as 1/8 point.
Treasury prices have been hovering near record highs in recent sessions on the improved outlook for inflation and recent statistics confirming the slow pace of economic growth.
The long bond's 6.66% closing yield on Monday was its lowest since the Treasury began selling 30-year bonds regularly 16 years ago.
Yesterday, the long bond briefly traded at a 6.65% yield. matching the intraday low set on March 8, but it did not best the high trade of 106 4/32 that also occurred that day.
Yesterday's economic news certainly seemed favorable for the bond market, and prices hit the day's highs after the May home sales and June consumer confidence numbers were released.
The Commerce Department said new home sales plunged 21% in May, to a 571,000 annual rate. The May decline wiped out all of April's revised 21.5% increase. The consensus forecast called for a 7% decline in May sales.
At the same time, the Conference Board said its measure of consumer confidence fell to 58.9% in June, from a revised 61.9% in May. Most economists thought the sentiment survey would show some improvement in June.
The June decline puts the Confidence Board's index at its lowest level since October.
David Resler, chief economist at Nomura Securities International, said the home sales report shows that sales have plateaued and the housing sector will not contribute much to the economy.
But Wood said given the volatility in the home sales statistics, it was better to look at the average of the last two months' totals. That average shows home sales have improved from the average for the previous six or seven months, he said.
Resler said the weakness in home sales and consumer confidence fit "a pattern of economic data we've seen lately that suggests the moderation in economic activity in the first half can no longer be written off as solely a function of bad weather in March.
"It appears the economy is genuinely on a slower growth path than at the tail end of 1992," he said.
Resler is now estimating the economy will grow less than 2.5% this year, "which is at least a half point lower than what we were looking for when the year started," and he blames the softer outlook on the Clinton administration.
"The prospects of higher taxes, and uncertainty over business operating costs associated with health-care reform and other regulatory burdens imposed by the Clinton administration, have put a damper on economic activity," he said. "Bill Clinton has managed to convert a silk purse into a sow's ear."
Traders said a lot of yesterday's buying was technical in nature. There were reports of buying by municipal issuers doing defeasance deals and purchases related to interest rate swaps on eurobond deals.
A note trader pointed out that purchases for interest rate swap and municipal defeasance deals occurs in the short or intermediate areas. and the preponderance of that kind of buying could explain why the long bond had lagged the rest of the market.
Wood said it was natural that the short end would post the biggest gains on yesterday's economic news, because the weak statistics calm any remaining fears the Federal Reserve will raise short-term rates.
"What we're now seeing is people are becoming increasingly convinced that the Fed, despite having a bias toward tightening, is not going to change policy any time soon," Wood said. "With a neutral monetary policy, it makes sense for the two-year to trade around 4%."
Some traders said yesterday they expect Treasury prices to head lower going into the employment report. They cited technical indicators that show the market is overbought at the long end.
"The market just feels as if everybody caught up with it," a coupon trader said. "Up until today, it felt as if people were still being dragged in kicking and screaming. Now a lot of shorts have been covered and there are some longs."
Yesterday's first piece of economic news, the May index of leading indicators, was a little weaker than expected but had no impact on Treasury prices.
The Commerce Department said the May index declined 0.3%. That compares with the revised 0.2%,.increase in April, which was reported last month as a 0.1% gain.
The September bond futures contract closed unchanged at 114.
In the cash market, the 71/8% 30-year bond was 1/32 lower, at 105 26/32-105 28/32, to yield 6.66%.
The 6 1/4% 10-year note rose 1/32, to 103 16/32-103 18/32, to yield 5.76%.
The three-year 4 1/4% note was up 3/32, at 99 24/32-99 26/32, to yield 4.31%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 3.04%. the six-month bill off one basis point at 3.12%, and the year bill three basis points lower at 3.32%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.08 3.14 3.096-Month Bill 3.20 3.26 3.261-Year Bill 3.43 3.47 3.522-Year Note 3.99 4.10 4.143-Year Note 4.31 4.44 4.515-Year Note 5.03 5.17 5.267-Year Note 5.39 5.53 5.6710-Year Note 5.76 5.88 6.0430-Year Bond 6.66 6.77 6.87Source: Contor, Fitzgerald/Telerate