The market continued its correction yesterday, as concerns about inflation and upcoming supply pressures weighed on prices. Securities traded lower across the board, with the long bond finishing the New York session off nearly a full point, to yield 6.62%.
In the absence yesterday of any significant economic releases or developments in Washington regarding the budget, market participants continued to focus on coming supply and Tuesday's comments on inflation from Federal Reserve Chairman Alan Greenspan.
Greenspan's semiannual Humphrey-Hawkins testimony included remarks about inflation that worried many market participants. The concerns carried over into yesterday's trading session and pushed prices lower.
Steven Slifer, a money market economist with Lehman Brothers, said everyone expected Greenspan to increase his estimate for 1993 inflation to about 3 1/4% from earlier predictions of 2 1/2%, which he did.
"But I also thought he would indicate that inflation next year would drop back to 21/4% or 2 3/4%, and obviously he didn't say that," Slifer said. "It almost looks to me like the Fed blinked with respect to inflation. It seems like they've said, ~3% is the best we can do, and we're not going to make much of an effort to go beyond that.' From a bond market perspective, that's disquieting."
Slifer said the long bond could make significant gains, perhaps even eventually into the 5 1/2% realm, if it became clear that the Fed was adamant about maintaining a 2 1/2% target on inflation.
"But if the goal is 3 1/2%, then you have to say the bond should be 6% or even 6 1/2%, and we're there," Slifer said.
In other reaction yesterday to Greenspan's testimony, Treasury Secretary Lloyd Bentsen said he does not expect the Fed to raise short-term interest rates, even though several economists interpreted his comments about inflation and the economy to mean just that.
Bentsen also said he found Greenspan's testimony in support of deficit reduction efforts to be "very helpful" to the administration's efforts to cut the federal budget gap by $500 billion over live years.
Greenspan said Tuesday that the bond market would probably react unfavorably if Congress or the White House retreated from that goal.
In addition to inflation concerns, bond market participants say they are also apprehensive about upcoming supply.
The Treasury announced yesterday that it will auction $16 billion in two-year notes and $11 billion in five-years next week. In addition, the quarterly refunding announcement is expected shortly.
The September bond futures contract closed off27/32, to 114.31.
In the cash market, the 7 1/8% 30-year bond closed down 30/32, to yield 6.62%.
The 6 1/4% 10-year note was down to yield 5.83%. The 5 1/8% five-year note dropped 15/32, to yield 5.16%. And the 4 1/8% fell 1/8 point, to yield 4.12%.
Rates at the short end were mostly higher, with the three-month bill up one basis point at 3.08%, the six-month bill unchanged at 3.20%, and the year bill three basis points higher at 3.37%. Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.12 3.04 3.176-Month Bill 3.27 3.19 3.301-year Bill 3.48 3.37 3.512-Year Note 4.12 3.95 4.173-Year Note 4.45 4.24 4.475-Year Note 5.16 4.95 5.177-Year Note 5.50 5.32 5.5310-Year Note 5.83 5.69 5.8830-Year Bond 6.62 6.55 6.75Source: Cantor, Fitzgerald/Telerate