Treasury prices closed mixed after a quiet session yesterday, and traders said the talk of tax cuts and the supply left over from last week's refunding auctions continued to weigh on the long end.
Late in the afternoon, the 30-year bond was 1/2 point lower and yielded 7.35%. while short-term notes were unchanged to slightly higher.
"The front end is trading like a million bucks, and the long end is taking it on the chin," a government bill trader said.
The bulk of the day's trading occurred overseas and early in the New York session, as prices moved lower all along the yield curve on worries that President George Bush will promise tax cuts as part of his re-election effort.
Joseph Liro, an economist at S.G. Warburg & Co., said the long end's negative reaction to the talk of tax cuts was reminiscent of its poor performance in January and February when Congress was debating a fiscal package.
"The long end likes the idea that this economy is just sort of languishing, and it doesn't want to see anything that will stimulate the economy too much and bust the deficit higher." Mr. Liro said.
Traders said the sell-off also reflected the overhang of supply from the quarterly refunding auctions.
"We're suffering from the distribution process," the head of a government trading desk said.
Steven Wood, director of financial markets research at Bank of America, said dealers are still trying to distribute the five-year notes sold on July 29, as well as last week's $36 billion of refunding supply. The Treasury market faces still more supply next week, when the government sells two- and five-year notes again.
As for last week's refunding issues, "the three-years seem to be well distributed, the 10-years are so-so, and the bonds are not well distributed at all," Mr. Wood said. "Until we get some of the supply moved out to investors, the market won't see favorable price action. "
No one in the Treasury market seemed very interested yesterday in the situation in Iraq, and in fact the tensions seemed to be partly defused when Iraq allowed the United Nations officials to inspect its ministry buildings.
Even without a flight-to-quality trade the short end performed well yesterday, in contrast to the long end's problems.
"There's better selling of longer stuff and better buying from threes on in," a note trader said.
Another trader said the short end was getting a boost from buying to defease deals in other markets, including the $700 million of bonds the Tennessee Valley Authority sold yesterday.
Bill Oden, manager of the TVA's finance department, said the agency accepted bids for the defeasance of the four securities it refinanced yesterday. Merrill Lynch, CRT Government Securities, Chase Securities, and Goldman, Sachs & Co. each got the job of defeasing one of the outstanding issues until the call date, which range from Nov. 30 of this year to May 31 of next year.
The Federal Open Market Committee meets today, but few participants expect any immediate change in Fed monetary policy.
This morning's July housing starts report is expected to show a 2.8% rise, to a 1.2 million annual rate. This would reflect the impetus the housing market received from the Federal-reserve's rate cuts early last month, according to 13 economists surveyed by The Bond Buyer.
That increase would offset most of June's 3.2% decline in starts.
The September bond futures contract closed 1/2 lower at 105 16/.32.
In the cash market, the 7 1/4% 30-year bond was 15/32 lower, at 98 21/32-98 25/32, to yield 7.35%.
The 6 3/8% 10-year note fell 7/32, to 98 26/32-98 30/32, to yield 6.52%.
The three-year 4 5/8% note was up 1/32, at 99 30/32- 100, to yield 4.62%.
Rates on Treasury bills were little changed, with the three-month bill steady at 3.07%, the- six-month bill up one basis point at 3.17%, and the year bill unchanged at 3.26%.Treasury Market Yields Prev. Prev. Monday Week Month 3-Month Bill 3.11 3.17 3.236-Month Bill 3.24 3.26 3.331-Year Bill 3.36 3.39 3.482-Year Note 4.06 4.09 4.233-Year Note 4.62 4.53 4.725-Year Note 5.49 5.48 5.797-Year Note 6.03 5.98 6.3710-Year Note 6.52 6.49 6.8815-Year Bond 6.92 6.87 7.2530-Year Bond 7.35 7.36 7.65
