Treasury market prices ended narrowly mixed yesterday after a volatile session of trading, driven by gyrations in commodity prices.
The 30-year bond ended up 2/32, to yield 5.91%.
The market found its stride early in the session as retail buyers emerged and pushed prices higher across the board. Treasuries extended overnight gains once the New York trading session got underway as investors began placing bets on this week's round of inflation reports.
But a midafternoon spike in the Commodity Research Bureau's index, led by upward pressure in precious metals prices, sapped strength from the market and sent prices tumbling back to opening levels. Gold was the main culprit of the increase in the bureau's index.
Most of yesterday's price action took place at the hands of dealers and speculative players who bought and sold securities on gyrations in commodity prices. Treasury market observers still believe that economic and inflationary fundamentals support the bond market and were inclined to shrug off an increase in the bureau's index, which many view as an extremely volatile measure of price pressures.
"The positive inflation outlook is still on track," said Stephen Slifer, a managing director at Lehman Government Securities Inc. "The CRB tells you nothing about price pressures in the longer term. I'm still looking for 2.5 inflation for the year."
Even though no fresh news arose yesterday to push the market to trade, the long end attracted quite a bit of buying interest. Most of the buying reflected the market's positive tone ahead of the inflation reports, which market analysts generally expect to show that inflation remains under wraps.
Comments by Federal Reserve governor Lawrence Lindsey supported that view. Speaking in Indiana, Lindsey emphasized his optimism on inflation and prospects for slow growth.
The long end of the curve, in particular, benefited from the bullish market psychology. Fund managers were once again taking bets on longdated Treasuries and moving money out on the yield curve.
"Retail accounts were pretty active in the market and, should the upcoming inflation data paint a nice picture of price pressures in the economy, it's likely that we'll see more funds come out of the woodwork," one head government trader said.
The trader said the employment report for September quelled fears that the U.S. economy was on the rebound and has provided Treasuries with a solid base of support from domestic and foreign investors.
One reason for the renewed enthusiasm for U.S. government securities is the expectation that monetary policy will hold steady. Market participants agreed that Friday's jobs figures were weak enough to keep the Federal Reserve from boosting interest rates any time soon.
Expectations for steady Fed policy helped the long end of the Treasury market, which benefited from curve flattening trades. The yield on the long bond slightly ground lower yesterday as funds moved money out on the curve, encouraged by the positive inflation premium being built into the market.
Intermediate securities got a slight boost from heavy municipal defeasance. State and local governments were solid buyers in the middle of the Treasury yield curves as they resumed their defeasance programs.
The short end held its ground but generally underperformed other areas of the curve. Traders said that with expectations for steady monetary policy, investors believe other areas of the market will offer a higher rate of return.
The only economic report released yesterday was the Johnson Redbook Survey, which reports that October sales through Oct. 9 rose 1.2% above the same week in September. The reading was slightly stronger than expected, analysts said.
The Treasury Department's three- and six-month bill auctions drew moderate demand at average rates of 3.04% and 3.12%, as expected. The bid-to-cover ratios were relatively disappointing at 3.41 for the three-month and 2.90 for the six-month, though noncompetitive bids were decent at $1.326 billion and $951 billion, respectively.
Market participants said the tepid response to the bill sales yesterday reflected the impact of larger weekly Treasury auction volumes and the declining allure of the bill sector against the backdrop of steady monetary policy.
In futures, the September contract ended down 2/32 to 120.18.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 1/32 at 100.04-100.05 to yield 3.79%; the 4 3/4% five-year note ended down 3/32 at 100.15-100.17 to yield 4.62%; the 5 3/4% 10-year note was unchanged at 103.22-103.26 to yield 5.24%; and the 6 1/4% 30-year bond was up 2/32 at 104.17-104.21 to yield 5.91%.
The three-month Treasury bill was up two basis points at 3.01%; the six-month bill was up four basis points at 3.12%; and the year bill was up three basis points at 3.22%.