Short-term notes led the Treasury market lower yesterday as that area contended with this week's heavy supply schedule.
The 30-year bond close 1/8 point lower to yield 7.98%, and short-term notes were off 1/16 to 1/8 point.
The Treasury sold $13.5 billion of two-year notes yesterday, as well as $20.4 billion of three- and six-month notes at the regular weekly bill auction. The short end gets more new securities today when the Treasury sells $9 billion of five-year notes.
Hopes for further Fed easing and the recent wobbles in stock prices have made the short end the most popular part of the yield curve recently. But traders said the fact that quantities of securities are being sold this week in quiet pre-holiday trading could result in some indigestion at the short end.
Yesterday's $13.5 billion of two-year notes came at an average yield of 5.51% and will bear a 5 1/2% coupon, the lowest results at a two-year auction since December 1976.
Treasury Market Yields
Monday Week Month
3-Month Bill 4.54 4.69 5.08
6-Month Bill 4.66 4.78 5.22
1-Year Bill 4.76 4.86 5.28
2-Year Note 5.49 5.51 5.88
3-Year Note 5.84 5.86 6.16
4-Year Note 5.94 5.96 6.30
5-Year Note 6.58 6.55 6.91
7-Year Note 7.03 6.95 7.30
10-Year Note 7.45 7.33 7.62
15-Year Bond 7.72 7.67 7.84
30-Year Bond 7.98 7.84 8.02
Source: Cantor, Fitzgerald/Telerate
Douglas Schindewolf, a money market economist at Smith Barney, Harris Upham & Co., said the auction results were mixed. "The amount of bids submitted was fine, but the rate was higher than was generally expected around auction time.
"It suggests the dealers bid back for the securities," Mr. Schindewolf continued. "They did seem to want to guarantee they had a 5 1/2% coupon."
A note trader said dealers wanted a concession because activity is so thin this week, the securities will probably sit on their shelves for a while.
"The Street's going to end up buying this stuff and they're not going to be able to sell it this week," the trader said.
Mr. Schindewolf said the lackluster demand for the two-years did not mean the five-year would also be poorly bid.
Given the steepness of the yield curve, "you can pick up more than 100 basis points between the twos and the fives," he said. "That could be one reason the two-year was a little sloppy, but it could mean the five-year could go quite well."
Late yesterday, the when-issued five-years were bid at 6.59%.
As the short end dealt with supply, the long end continued to trade heavily.
Participants said the long end's inability to make any headway when Ford reported weaker-than-expected mid-November sales yesterday morning was a bad sign.
"Usually when a market doesn't go up on good news, that's the kiss of death," a pessimistic coupon trader said.
The weak Ford sales were partly offset by a small increase in General Motor's sales, and the sales rate for the Nov. 11-Nov. 20 period came in at 5.9 million. That was a slight improvement from the 5.7 million rate in early November, but analysts said it is still a very weak sales pace.
Bad economic news usually boosts Treasury prices but Mr. Schindewolf said the market's worries about possible tax cuts may have broken that relationship.
"In a sense, every time a weak number comes out, it makes it that much more likely that politicians will feel a sense of urgency about doing something" he said.
Even though the long end is having trouble, traders said the short end of the market is still basically in good shape, since the economic fundamentals are seen as positive for the market.
The December bond future contract close 1/32 lower at 9 3/32.
In the cash market, the 30-year 8% bond was 5/32 lower, at 100 2/32-100 6/32, to yield 7.98%.
The 7 1/2% 10-year note fell 1/8, to 100 6/32-100 10/32, to yield 7.45%.
The three-year 6% note was down 1/8, at 100 11/32-100 13/32, to yield 5.84%.
Rates on Treasury bills were mixed, with the three-month bill one basis point higher at 4.44%, the six-month bill steady at 4.51%, and the year bill two basis points higher at 4.55%.
Merrill Sees Subpar Recovery
The positive fundamentals supporting short-term Treasuries were evident yesterday when Merrill Lynch's economists and market strategists presented their 1992 outlook.
Merrill's scenario includes another couple quarters of sluggish growth, followed by a pick-up by the middle of next year that will be only half as strong as a normal recovery.
Donald Straszheim, the firm's chief economist, said it was pointless to argue about whether or not the economy would "dip" back into recession.
"The issue won't be so much recession again as recession still," Mr. Straszheim said.
He is calling for 1.5% growth in the current quarter and 1.9% growth during the first quarter of next year, but said given the weakness in recent indicators, "the risk is very much on the downside" for both quarters.
After a "production pick-up" in the third quarter, "what's happening now is holes are redeveloping in all different areas of the economy," Mr. Straszheim, said.
He blamed the setbacks on wary consumers. "People are afraid to buy houses, people are afraid to buy cars," he said. "They're afraid to make any commitment at all when they're fearful of losing their jobs."
Mr. Straszheim expects Fed policymakers to lower the funds rate another 25 basis points, to 4 1/2%, probably at the Federal Open Market Committee meeting that starts Dec. 17, and he said inflation will remain around 4%.