Two-Year Auction Is Well Bid, But Selling Damages Long End

A successful two-year sale left short-term note prices unchanged to slightly higher at yesterday's close, but long-term securities were hit by selling and ended slightly lower.

Late in the afternoon, the 30-year bond was off 1/8 point to yield 7.88%.

The $13 billion of two-year notes came at an average yield of 6.14%, the lowest rate at a two-year sale since 1977, and will bear a 6 1/8% coupon.

The 6.14% average and the partial awards at the high bid of 6.15% were in line with market expectations.

Other auction results, such as the $1.067 billion of competitive bids and the total amount of bids, at almost three times the size of the issue, fit the historical averages for two-year auctions.

One interesting statistic showed that only 78.8% of the notes went to New York bidders, down from the 89.9% average won by New York bidders over the last 12 two-year sales.

The drop in New York's share suggests "some people who had the ability to bid directly did so," said Joseph Liro, money market economist at S.G. Warburg. "It does not indicate spectacular retail demand."

Although retail investors traditionally enter competitive bids through primary dealers, it is possible for them to enter such bids directly through regional Federal Reserve banks.

"I think we had a reallocation of bids, and some were submitted directly into regional Feds," Mr. Liro said.

By late yesterday, the price on the when-issued notes had improved sufficiently to drive the yield down to 6.12% from the 6.14% auction average.

Yesterday's successful sale bodes well for today's auction of $9.25 billion of five-year notes, participants said.

"The market continues to have an excellent tone," Mr. Liro said.

Yesterday's economic news, which included an unexpected decline in September consumer sentiment and a slightly stronger-than-expected 6.3 million sales pace for cars in mid-September, did not detract from that tone, he said. The reports "didn't indicate that there's any kind of building momentum in the economy, so that helps the bond market," he added.

The Treasury market faces one large hurdle before the five-year auction: the August durable goods report due out this morning.

The durable goods number "will go a long way to set the stage for the five-year sale," Mr. Liro said. "If it's down more than expected, it could prompt a bit of a rally."

Economists surveyed by The Bond Buyer on average expect a 4.3% decline in August orders, which would offset a large part of the 11.2% surge in July.

The long bond, which was slightly higher at the New York opening, traded a little higher in mid-morning when the Conference Board reported that its September survey found consumer confidence eroded further this month.

The index came in at 72.7 in September, down more than three points from the 76.3 posted in August.

Consumers' optimism about the current economic environment was hit hardest, falling to 39.3 in September from 45.1 in August, while their confidence about the future was down only slightly in September to 95, from 96.8 in August.

Michael Niemira, business economist at Mitsubishi Bank, said sentiment might not be as bad as the report suggested on its surface.

Mr. Niemira pointed out that weekly numbers from ABC News and the University of Michigan were more upbeat than the Conference Board report. And even the Conference Board survey contained some positive details, including increases in the number of consumers planning to buy appliances, houses, and cars, he said.

"The bottom line is, it's basically a sluggish picture for consumers, but that's what we expected," Mr. Niemira said.

Later in the morning, prices retreated when mid-September car sales figures began coming in stronger than expected.

With most dealers having reported their sales, analysts estimated mid-September sales at a 6.3 million annual rate. That is stronger than the 6.1 million consensus forecast and well above the 5.4 million pace in early September.

When the short end bounced a little after the well-bid auction, long-term prices remained soggy, but traders said that had more to do with technicals than with the economic news.

"I think it was probably common sense that inspired the sellers," a government coupon trader said. "Everybody's long. Some of the longs decided to sell."

The December bond futures contract closed 3/16 lower at 99 2/32.

In the cash market, the 30-year 8 1/8% bond was 1/8 lower, at 102 21/32-102 25/32, to yield 7.88%.

The 7 7/8% 10-year note fell 3/32, to 102 3/32-102 7/32, to yield 7.55%.

The three-year 6 7/8% note was unchanged 7/32, at 101 9/32-101 11/32, to yield 6.35%.

In when-issued trading, the five-year notes to be auctioned today stood at 7.06%.

Rates on Treasury bills were mixed, with the three-month note up one basis point at 5.19%, the six-month bill steady at 5.23%, and the year bill down one basis point at 5.22%.

Table : Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 5.32 5.32 5.51

6-Month Bill 5.44 5.44 5.65

1-Year Bill 5.50 5.52 5.78

2-Year Note 6.11 6.14 6.36

3-Year Note 6.35 6.44 6.70

4-Year Note 6.55 6.59 6.84

5-Year Note 7.05 7.07 7.36

7-Year Note 7.34 7.39 7.69

10-Year Note 7.55 7.59 7.87

20-Year Bond 7.81 7.84 8.07

30-Year Bond 7.88 7.91 8.12

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