After a session characterized by wild price swings, the Treasury market simmered down into recent ranges yesterday and ended narrowly mixed.
The 30-year bond closed down 04/32, to yield 6.15%.
The market gyrated in reaction to a number of factors, including strong news on the U.S. economy, a rise in commodity prices, and uncertainty over the upcoming vote on the North American Free Trade Agreement.
While prices swung widely during the session, overall volume was generally light as most larger accounts stayed at bay ahead of the economic reports and the Nafta vote slated for this week. Therefore, price movements were exaggerated by a general lack of liquidity, traders said.
After the dust cleared, participants said the market had entered a brief consolidative period following sharp price declines in recent weeks. Underpinning Treasuries is the growing belief that the market has located a bottom -- a comfort zone where investors can tolerate stronger economic growth.
"The market has found a floor and prices have settled into a range where everyone is happy," said one head governments trader at a Chicago-based primary dealership.
Prices weakened through the morning in response to the release of economic statistics that suggested further improvement in the manufacturing sector. Higher commodity prices were another factor as traders reacted to a spike in the Commodity Research Bureau's index of 21 commodity prices.
But the price declines were retraced through the afternoon as short-covering and follow-through buying emerged. Prices rebounded to opening levels, where they hovered for the remainder of the session.
Though the market has stabilized in the last two sessions, observers cautioned that the risks remain on the downside. Investors still need to contend with a number of potentially stronger economic releases this week, including housing starts, merchandise trade, and the Philadelphia Federal Reserve's survey of manufacturing activity, traders said.
Broad-based signs of growth in the economy have put fixed-income investors on the defensive in recent weeks and placed the spotlight on every forthcoming economic indicator -- even ones that historically have held little significance for Treasuries, observers said. Therefore, the market is vulnerable to hints of strength in the economy this week.
Nafta is another hurdle that the market must clear on its way to lower yields. Treasury market players believe that with the removal of trade tariffs with neighboring countries, the prices of many goods will decline. Therefore, most bond market players are backing the treaty.
A "no" vote on Nafta would have negative implications for the U.S. bond market because of the consequences for inflation. It would also damage President Clinton's ability to push through deficit reduction programs, such as health care reform.
"There's no doubt that we would have a less inflationary environment with the treaty than without it," said Donald Fine, chief market analyst at Chase Securities Inc.
The approach of the end of the year is another worry for holders of U.S. government debt, as investors look to book profits for 1993. After a good year in the bond market, traders said many larger accounts are not willing to plow money back into the Treasury market, particularly with the economy showing persistent signs of strength.
The steady flow of better economic news continued yesterday.
The Commerce Department reported sales by U.S. businesses climbed faster than did their stocks of unsold goods during September. Sales rose 0.8% to $597.4 billion after rising 1.2% in August, while inventories increased 0.3% to $868.2 billion after rising 0.3% in August.
Economists said the report hinted at rising production and economic growth and suggested that the Commerce Department may need to revise third-quarter gross domestic product upward.
"Inventory rebuilding will be a propellant to growth as we move forward," said Michael Niemira, financial economist at Mitsubishi Bank, noting the report also suggested possible increases in future production as businesses order more goods to replace those sold off their shelves.
Earlier in the day, the Federal Reserve reported industrial production by the nation's manufacturers climbed 0.8% in October. The increase followed a 0.4% gain in September and was the largest of the year. Economists said the report was consistent with the recent pattern of stronger activity in the manufacturing sector of the economy.
The Treasury Department's three-and six-month bill auctions drew solid demand at average rates of 3.11% and 3.26%, respectively. The six-month bill came in with a tail at 3.27%. The bid-to-cover ratios were 4.18 for the three-month and 4.46 for the six-month.
In futures, the December contract ended down 06/32 to 116.28.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday Up 02/32 at 99.19-99.20 to yield 4.07%, the 4 3/4% five-year note ended up 03/32 at 98.30-99.00 to yield 4.98%, the 5 3/4% 10-year note was unchanged at 100.21-100.25 to yield 5.64%, and the 6 1/4% 30-year bond was down 04/32 at 101.05-101.00 to yield 6.15%.
The three-month Treasury bill was down one basis point at 3.10%, the six-month bill was unchanged at 3.24%, and the year bill was down one basis point at 3.38%.Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 3.10 3.10 3.016-Month Bill 3.24 3.31 3.101-Year Bill 3.38 3.49 3.262-Year Note 4.07 4.09 3.823-Year Note 4.42 4.36 4.065-Year Note 4.98 5.01 4.637-Year Note 5.22 5.22 4.8010-Year Note 5.64 5.63 5.2430-Year Bond 6.15 6.19 5.84