A report that manufacturing activity last month in Chicago was weaker than expected set off a sharp rally yesterday in the Treasury market that pushed the 30-year bond thrugh the 7 1/2% yield level.
The 30-year bond closed more than 3/4 point higher to yield 7.44%, markign the first time the long bond has closed below 7 1/2% since early in 1987.
Yesterday's gains were seen as a continuation of the rally that allowed the 30-year to break through 7 3/4% less than two weeks ago.
The gains occurred in thin trading, but a government bond trader said the move was still significant.
"The trend's very much intact and continues to assert itself," the trader said. "Thin or thick trading, you've got to respect it."
Yesterday's Chicago purchasing managers' index was a surprise, falling to 47.9% in December from 52.7% in November, when analysts had expected it to come in around 50%.
The Chicago report, together with the Philadelphia Fed business survey released a couple of weeks ago, suggests the December national purchasing managers' index due out Thursday will decline more than expected. And some traders said the scenario of a deteriorating manufacturing sector gives the Federal Reserve a motive to cut the funds rate again.
Traders said the rally started when the Chicago report gave the 30-year bond enough impetus to break below 7 1/2%, the resistance level that had restrained the bond all of last week.
The 30-year bond's break through that level generated more technical buying, and declines in commodity prices added to the rally.
The Commodity Research Bureau index closed 1.39 points lower yesterday, at 207.31, as almost all the components registered price declines, an analyst at McCarthy, Crisanti & Maffei said.
Joseph Liro, a money market economist at S.G. Warburg & Co., said extension trades were an important feature of yesterday's trading, and he linked investors' confidence in buying longer-term paper with yesterday's favorable inflation news, including lower commodity prices and a decline in the Chicago report's price component.
"People are very satisfied with what you're seeing in terms of the inflation in 1992 and into 1993," Mr. Liro said. "They're searching
Treasury Market Yields
Monday Week Month
3-Month Bill 3.95 3.81 4.46
6-Month Bill 3.96 3.95 4.56
1-Year Bill 4.10 4.11 4.64
2-Year Note 4.75 4.81 5.31
3-Year Note 5.02 5.11 5.67
4-Year Note 5.15 5.23 5.78
5-Year Note 5.93 6.00 6.41
7-Year Note 6.38 6.45 6.85
10-Year Note 6.72 6.86 7.29
15-Year Bond 7.17 7.25 7.63
30-Year Bond 7.44 7.52 7.90
Source: Cantor, Fitzgerald/Telerate
for yield and therefore extending out the curve."
Most traders said they had been very little activity of any kind. But they reported hearing about extension trades, as well as reports that investors were selling mortgage-backeds because of worries about rising prepayment rates and putting that money into intermediate Treasuries.
The other two indicators released yesterday, November existing home sales and December consumer confidence, had less impact on the bond market.
November existing home sales increased 5.4%, a positive sign for the economy, and last month's consumer confidence index came in at 52.4, little changed from the revised November reading of 52.7.
David Wyss, chief financial economist omist at DRI/McGraw Hill, said the home sales numbers show people are taking advantage of lower mortgage rates.
Mr. Wyss said, though, that yesterday's numbers did not change his forecast of a "bad" first quarter.
"Housing looked strong, but you can't expect housing to help the economy until the spring," he said. "It's hard to build houses in January."
And Mr. Wyss said it will be difficult for consumer sentiment to improve substantially until consumers stop reading about big corporations laying off workers.
The March bond future contract closed 11/16 higher, at 104 8/32.
In the cash market, the 30-year 8% bond was 13/16 higher, at 106 15/32-106 19/32, to yield 7.44%.
The 7 1/2% 10-year note rose 5/8, to 105 12/32-105 16/32, to yield 6.72%. The three-year 6% note was up 7/32, at 102 16/32-102 18/32, to yield 5.02%.
In when-issued trading, the 5% two-year note was up 5/32 at 100 14/32-100 15/32 to yield 4.75%, and the 6 1/8% five-year note gained 5/32 at 100 24/32-100 26/32 to yield 5.93%. The when-issued notes settle today.
Rates on Treasury bills were mixed, with the three-months bill up two basis points at 3.8%, the six-month bill down four basis points at 3.85%, and the year bill four basis points lower at 3.94%.