Good 10-Year Note Auction Sends Treasuries Scrambling Higher

High yields and causes for concern attracted investors to Treasuries, but the bullishness needs incubation.
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Strong demand for the newest 10-year Treasury note boosted bonds, enabling them to overcome the latest rise in oil prices, which rose to heights not seen since October 1997.

At the end of a session that included market-supportive news of an insurance company in trouble and a market-destabilizing rumor that

Fed

Chairman

Alan Greenspan

would resign at the next Fed meeting on Aug. 24, the benchmark 30-year Treasury bond was up 14/32 at 87 2/32, trimming its yield 4 basis points to 6.21%.

The Fed's

Beige Book, an anecdotal account of economic conditions around the country that goes into the basket of reports Fed policymakers consider, was deemed ignorable, as were postclose comments by

San Francisco Fed

President

Robert Parry

.

The strong reception for the second of three legs of the Treasury's quarterly refunding was by far the most important force in the market. The Treasury sold $12 billion of 10-year notes, on the heels of yesterday's $15 billion five-year note auction and ahead of tomorrow's $10 billion 30-year bond sale.

Strong demand for securities at auction doesn't guarantee an improving market; the big institutional investors whom dealers count on to take the securities off their hands in the days after a refunding may insist on lower prices. Even so, strong demand at the auction is better than weak. It highlighted the risk of being short bonds, and the market rallied.

The success of an auction is measured by the yield at which the new securities are awarded, relative to the yield at which they were trading when bids were due. In today's auction, the new 10-year notes traded at 6.11% at the 1 p.m. bidding deadline, but were awarded at the much lower yield by auction standards of 6.085%.

Matt Frymier, a trader at

Banc of America Securities

in San Francisco, said "a very large leveraged buyer" forced the awarded yield lower by placing a big order for the new 10s shortly before the bidding deadline.

The awarding of the notes at a lower-than-expected yield set off something of a mad scramble for securities by dealers who needed them to cover short positions, but who had bid too high (in yield terms) to be awarded any, Frymier said.

More fundamentally, the auction's success shows that with Treasury yields at their highest levels since the fall of 1997, there is genuine -- if tentative -- interest in buying bonds, market participants said.

"Sentiment has been so negative lately and it was carrying over, but we've gotten to levels where we're starting to get some interest," Frymier said. "The market could certainly go down again," he added, but, at the very least, "I think we've gotten into a range where people are not comfortable being hugely short."

The shift in sentiment stems partly from the yield levels, which in addition to being at some of their highest levels in 20 months are much higher relative to the fed funds rate than they were then, Frymier noted.

At the same time, there has been plenty of news that makes investors want to reach for the safety and liquidity of Treasuries this week. Today brought news that

General American Life Insurance

, Missouri's largest life insurance company, is unable to pay back $6.8 billion of customer deposits. Yesterday featured reports of political instability in Russia, as

Yeltsin

dismissed his latest prime minister. Disputes between India and Pakistan, North and South Korea, and China and Taiwan have been simmering for several weeks, and the stock market has been shaky as well recently.

"In essence, the results told us that given the very severe backup

in yields of the last several days, we've reached a point where people are prepared to give these levels a shot,"

Banc One Capital Markets

senior financial economist Anthony Karydakis said.

But, he cautioned, "this is still a market that's not on solid grounds, despite the somewhat better tone we had today." A stronger-than-expected July

retail sales

report tomorrow, or bigger-than-expected increases in the core producer and consumer price indices on Friday and Tuesday could easily stamp out the bullishness that spread through the market today, he said.