Treasury prices fell for the third session in a row yesterday when the market's worries about the dollar scared some buyers away from the two-year note auction.
Late in the day, the 30-year bond was 3/3 point lower yield 7.47%. Short-term notes were down about 1/8 point.
Matthew Alexy, an economist at First Boston Corp., said the lack-luster bidding at the two-year sale reflected the uncertainty about the dollar.
"The auction wasn't a disaster, it just reflects investor caution," Mr. Alexy said. "We're in uncharted territory as far as the currencies are concerned, so people are going to be cautious."
The dollar hit new post-World War II lows against the mark for the third session in a row yesterday, reaching 1.3945 marks on the news that polls show the Sept. 20 French vote on the Maastricht accord will be close.
The threat to the Maastricht agreement, which would move European nations a step closer to political and economic union, boosted the value of the German mark at the expense of other currencies.
By late in the day, the dollar had improved and was quoted at 1.4015 marks, little changed from 1.4020 late Wednesday.
But the head of a Treasury trading desk said he does not think the dollar will be able to improve much until the French vote. Absent a stable dollar or some important economic news, he expects Treasury prices to deteriorate further.
"The market will continue to have a flabby tone," he predicted. "I don't think we've put in the lows."
Mr. Alexy said that with the 30-year bond approaching a 7 1/2% yield, current levels represent some value.
"The economy doesn't appear to be that strong, and at some point in time the dollar's going to find a floor and the market will do okay," he said. "But no one's rushing in."
The $15 billion of two-year notes came at an average yield of 4.30% and will bear a 4 1/4 coupon, little changed from the July auction's 4.29% average and 4 1/4% coupon.
The 4.30% average was in line with market expectations. However, the Treasury also awarded 70% of the bids entered at 4.31%, which was more than the market expected.
Another unfriendly detail in the results was the 2.36-to-1 ratio of bids to notes awarded, which is lower than the 2.73-to-1 over last year. In addition, the $848 million of noncompetitive bids was also skimpy for a two-year auction.
Treasury prices drifted lower after the results were announced, and by late in the day the new two-year had fallen in price and its yield had risen to 4.34%.
A bill trader pointed out that the $23.2 billion of three- and six-months bills auctioned Monday were also trading at a loss.
"So far this week, we've bid on $38 billion dollars of securities, and they're all under water," he said. "That, coupled with the weaker dollar, is pressuring the market down."
Some participants said the two-year results increased worries about today's sale of $10.5 billion of five-years, since the two-year is usually more successful.
But the desk official said the five-year is "the one of the boys all want to buy."
While the yield on yesterday's two-year was very close to the yield at last month's two-year auction, the when-issued five-year note recently was quoted at 5.7%, up from 5.68% last month. This suggests the five-years are a bargain, he said.
Yesterday morning, Treasury prices improved when the Conference Board said its August survey showed consumer confidence fell to 58.0 from a revised 61.2 reading in July. The consensus forecast was for a small increase in confidence.
The August decline, which brought the index to its lowest level since March, occurred as consumers grew more pessimistic about both the current economy and future expectations, according to the Conference Board. Analysts said that lack of confidence is an important barrier to sturdier economic growth.
Traders said the rest of the day's indicators were overshadowed by the auction results and the dollar.
The bond market showed little reaction to the report of a 3.9% increase in July existing home sales, to a 3.48 million annual rate.
General Motors' week car sales in mid-August offset the strong figures reported by Ford, leaving the mid-month sales rate at 6.1 million.
That was up a little from the 5.7 million pace in early August, but below the consensus forecast for a 6.3 million rate
The market also ignored the Johnson Redbook report that department store sales during the first three weeks of August were 0.2% below sales for the same period in July.
The September bond futures contract close 11/32 lower at 104 12/32.
In the cash market, the 7 1/4% 30-year bond was 11/32 lower, at 977 7/32-97 11/32, to yield 7.47%.
The 6 3/8% 10-year note fell 10/32, to 97 11/32-97 15/32, to yield 6.72%.
The three-year 4 5/8% note was down 1/8, at 99 11/32-99 15/32, to yield 4.84%.
Rates on Treasury bills were mixed, with the three-month bill up four basis points at 3.18%, the six-month bill up three basis points at 3.27%, and the year bill one basis point lower at 3.43%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.25 3.12 3.25
6-Month Bill 3.35 3.21 3.35
1-Year Bill 3.54 3.32 3.53
2-Year Note 4.28 4.01 4.19
3-Year Note 4.84 4.54 4.65
5-Year Note 5.73 5.41 5.59
7-Year Note 6.26 5.97 6.09
10-Year Note 6.72 6.47 6.60
15-Year Bond 7.05 6.88 6.98
30-Year Bond 7.47 7.32 7.43
Source: Cantor, Fitzgerald/Telerate