A lack of news provided buyers with few incentives to stay in the market yesterday, and note and long bond prices ended slightly lower as a result.
But the declines were viewed as a mild setback and not a reversal of the market's recent gains.
The benchmark 30-year bond closed down 5/32 to yield 6.30%.
The long bond held the spotlight again yesterday as money moved out of the shorter maturities and into longer-date paper. Meanwhile, high hopes for a bill pass this week kept the bill sector in positive territory.
Dealers said that retail and speculative buying at the long end of the yield curve caused further flattening of the curve.
Speculative players riding out the ongoing rally continued to pour money into bonds, while retail investors continued to purchase zero-coupon bonds, participants said. Players on the buy side of the market are buying strips to get the most out of every move in prices.
The long bond experienced some selling pressure yesterday, but dealers said that every downtick brought buyers into the market. The cash bond also outperformed the futures contract through the morning.
This activity, the dealers said, supported the market's view of scarcity value in the 30-year, which the Treasury has begun offering on a semi-annual cycle instead of quarterly.
"The only thing that's unpleasant about the bond is its low yield," said Joseph Liro, chief economist at S.G. Warburg & Co. "The market is becoming increasingly accepting of the fact that the inflation rate will hold between 2.5% and 3% for the next couple of years."
Tony Crescenzi, head of fixed-income trading at Miller, Tabak, Hirsch & Co., said that many larger accounts are trying to avoid placing bets on the market. With yields at their lowest levels in 16 years, participants are wary of establishing long positions, he said. However, he noted that the recent rally has made them just as cautious about shorting the market.
"People are staying out of the market because they're trying to figure out where it's going," Crescenzi said.
Looking ahead, analysts remain bullish on the market and say that this week's dearth of economic indicators is unlikely to hamper that feeling.
While many in the market have pointed to transitory factors to explain the market's recent rally, including strip buying from Brazil and foreign sponsorship, most participants believe that recent price action should be viewed as a fundamental shift in the market's future expectation.
"You don't embrace bonds below 6.50% if you don't believe inflation and the economy will be on you side," S.G. Warburg's Liro said, noting that positive fundamentals and the flattening trend of the yield curve continue to make the long bond the issue of choice for dealers and investors.
Crescenzi of Miller Tabak also subscribed to that bullish scenario. He said that the cash market's ability to outperform futures is an indicator of the willingness of investors to put money into government securities.
"People could go the safe route and position themselves in the futures market, but they are buying in the cash market," Crescenzi said. "That's as good a sign as any that people have confidence in the market."
In early trading, the30-year bond supplied another one for the history books. Strong buying in overseas trading brought the bond down to a yield of 6.28%, the lowest reached since the Treasury Department began auctioning 30-year bonds on a regular basis in 1977.
In what has become a recurring theme, the long bond continued to outperform the rest of the yield curve.
Curve plays continued to dominate the market yesterday, as participants sold the short and intermediate sectors for the long bond. Traders said that momentum from the market rally and extraordinarily positive fundamentals continue to provide the bond with a solid base of support.
While the short end of the market is generally underperforming the rest of the curve, the bills did slightly better on expectations for a bill pass today.
While the market continued to focus on long bond, it showed little reaction to the housing starts report for June. The Commerce Department reported that starts fell 2.7% in July to a seasonally adjusted annual rate of 1.212 million units. This follows a revised 0.2% drop in June, previously reported as unchanged.
The July drop resulted from a 1.7% decline in single-family units to a1.060 million rate, and a 9.5% decline in multifamily units to a 152,000 rate.
Kenneth Mayland, chief economist at Society National Bank in Cleveland, said the reports did little more that reinforce the market's view that the housing sector remains underwater and is unlikely to lead the economy to more robust growth, as it has in the past.
"This report just shows more of the same weakness we've seen," Mayland said. "You have the lowest mortgage rates in 20 years and the economy is growing, yet activity in the housing sector hasn't improved."
Mayland and other economists said that the Midwest floods depressed housing activity in that region.
Building permits gained gained 3.0% in July to 1.149 million units, following a revised 0.5% drop in June, previously reported as a 1.3% drop.
Like starts, permits dropped in the West and the Midwest, while increasing in the South and Northwest. Compared to July 1992, starts were up 9.6% and permits were up 6.1%. On an unadjusted basis, starts so far this year are up a scant 2.0% compared to the same period in 1992.
Daniel Seto, economist at Nikko Securities, said that while the starts numbers were disappointing, the permits figures were encouraging. "This morning's report didn't change the building permits picture, but it did show that some progress is being made," Seto said.
The Johnson Redbook survey of retail sales was also shrugged off by the market. The index fell 0.5% for the week ended Aug. 14 from the July average.
In futures, the September contract ended down 9/32 to 116.05.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday down 2/32 at 100.15-100.16 to yield 3.98%, the 5 1/4% five-year note ended down 6/32 at 100.24-100.26 to yield 5.06%, the 6 1/4% 10-year note was down 8/32 at 100.08-100.10 to yield 5.70%, and the 7 1/8% 30-year bond was down 5/32 at 99.05-99.07 to yield 6.30%.
The three-month Treasury bill was down one basis point at 3.06%, the six-month bill was unchanged at 3.20%, and the year bill was also unchanged at 3.39%.Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.06 3.08 3.086-Month Bill 3.20 3.25 3.221-Year Bill 3.39 3.48 3.402-Year Note 3.98 4.08 4.003-Year Note 4.37 4.36 4.305-Year Note 5.06 5.12 5.007-Year Note 5.34 5.42 5.3710-Year Note 5.70 5.80 5.7330-Year Bond 6.30 6.44 6.61Source: Cantor, Fitzgerald/Telerate
