Long-term Treasury prices plummeted after yesterday's 30-year bond auction as the cumulative weight of the $36 billion of new refunding supply and some Republican talk about lowering taxes caused massive selling.
Late in the day, the 8% 30-year bond was down 1 1/4 points to yield 7.41%, and the new long bond was quoted at 7.37%, up sharply from the 7.29% average yield at the auction.
"This is supply indigestion big time," a bond salesman said.
Traders said the bond auction actually went well and was not to blame for the sell-off. And they noted that all of yesterday's economic new was favorable for the bond market, including the scant 0.1% increase in July consumer prices and the weaker than expected early August car sales figures.
The sell-off was seen as a technical move in response to the huge quantity of supply the market has absorbed this week and the relatively expensive levels the new securities were sold at.
"The market had gotten ahead of itself in terms of yields, particularly long yields, and it seemed to us the market didn't have any sort of retail commitment," said William Griggs, a managing director at Griggs & Santow Inc.
By the usual standards, the 30-year auction went well.
The $10 million of notes came with a bullet bid of 7.29%, which was in line with the market's expectations at bidding time. The bid-to-cover ratio of 2.49-to-1 was strong for a bond sale, and small investors submitted a respectable $354 million of noncompetitive bids.
Initially, the market reacted well to the auction results. Prices held in near the levels at which the bonds were auctioned for about half an hour, then dropped abruptly.
"Dealers bought it in an aggressive fashion," Mr. Griggs said. "They got it and started to offer it to other people, and no one wanted it.
"In addition, some people with nice profits started to sell, and the combination was deadly," he continued. "The thing started to steamroll and went to pieces in a big hurry."
James Kenney, head of Treasury trading at Prudential Securities, said the market's break through several technical support levels fueled the price decline by bringing in new sellers.
Participants said they were also unnerved by James Baker's remark yesterday that lower taxes should be an important part of the Republican party platform.
Mr. Baker, the secretary of state, was named White House chief of staff yesterday and talked about lower taxes in his farewell address at the State Department.
Traders said the discussion of tax cuts revived their worries about the federal budget deficit and suggested the economy might soon be on the mend.
General Motors' weak early August sales, which dragged the overall sales pace below the 6 million level for the first time since May, came out in mid-afternoon, but traders said the market was in too much trouble for the news to have any impact.
Despite the violence of yesterday's sell-off, there were still bulls to be found.
"If the reality of the situation is a low-growth, low-inflation environment, then the fundamentals haven't changed," the bond salesman said. "If that's the case, at these levels you're probably supposed to be buying some paper."
Treasury prices spiked higher on yesterday morning's indicators, then quickly returned to Wednesday's closing levels to wait for the bond auction.
The July consumer price index rose only 0.1% and the core rate, excluding food and energy prices, was up 0.2%, when the consensus forecast called for a 0.2% increase in both numbers.
July retail sales were up 0.5%, which was higher than the consensus forecast for a 0.2% increase, but the big downward revision to June sales took the sting out of the July increase. June's change in sales was revised to a 0.3% drop from the 0.5% gain reported last month.
"CPI was better behaved than expected, which helped, but I think the market got most of its fuel after the print of the downward revision to June retail sales," said Jerry Zukowski, an economist at PaineWebber Inc.
Mr. Zukowski said, though, that the numbers did not give the market any new information.
"We knew we had a sluggish economy and well-behaved inflation and none of these numbers move us out of that generic picture," he said.
Analysts said the market ignored the report of a 66,000 drop in jobless claims to 403,000 for the week ended Aug. 1, regarding it as a distortion related to General Motors' shutdown in July. In the previous week, filings by General Motors employees had contributed to a 69,000 jump in claims.
"The claims number next week is expected to soar again as we get the last impact from GM," said Michael Niemira, a business economist at Mitsubishi Bank. But he said that when the General Motors' filings are filtered out, the level of claims seems to be about unchanged.
The only surprise in yesterday's numbers was the 5.7 million car sales pace in early August. The market had expected a 6.5 million sales pace.
Analysts said the car sales figures were disconcerting, but warned against reading too much into the 10-day sales figures.
The September bond futures contract closed 1 5/32 lower at 105 19/32.
In the cash market, the 30-year 8% bond was 1 7/32 lower, at 106 26/32-106 30/32, to yield 7.41%.
The when-issued 6 3/8% 10-year note fell 29/32, to 98 15/32-98 19/32, to yield 6.56%.
The when-issued three-year 4 5/8% note was down 5/32, at 99 19/32-99 21/32, to yield 4.75%.
Rates on Treasury bills were lower, with the three-month bill four basis points lower at 3.08%. the six-month bill off three basis points at 3.18%, and the year bill one basis point lower at 3.30%.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing yesterday that: The nation's M1 money supply rose $ 4.5 billion to $966.8 billion in the week ended Aug. 3; the broader M2 aggregate increased $2.4 billion, to $3.5 trillion; and M3 increased $1.3 billion, to $4.2 trillion, in the same period.
The Fed also said the federal funds rate averaged 3.24% for the week ended Wednesday, down from 3.33% the previous week.
Treasury Market Yields
Thursday Week Month
3-Month Bill 3.12 3.20 3.21
6-Month Bill 3.25 3.32 3.29
1-Year Bill 3.40 3.51 3.45
2-Year Note 4.14 4.26 4.20
3-Year Note 4.75 4.69 4.69
5-Year Note 5.58 5.66 5.77
7-Year Note 6.08 6.15 6.33
10-Year Note 6.56 6.62 6.84
15-Year Bond 6.93 7.00 7.20
30-Year Bond 7.41 7.44 7.60
Source: Cantor, Fitzgerald/Telerate