Treasury Bills Soar as Cash Is Coronated

Demand for all the but the shortest-maturity Treasuries -- some of which rallied sharply -- collapsed again today, lifting the 30-year bond's yield to its highest level since mid-February.

Several factors were at work. Apprehension about how much the

Fed may raise the short-term interest rate it controls in the months ahead continues to make investors shy away from bonds in general. The

Treasury Department

conducted a buyback operation that supported prices early in the session, but when it was finished, some dealers may have moved to sell issues they had failed to sell to the Treasury. In addition, there are large corporate new bond issues in the offing that will compete with Treasuries for investor dollars. And commodity prices continue to move higher, with oil once again breaching $30 a barrel today.

The benchmark 10-year Treasury note fell 12/32 to 99 22/32, lifting its yield 5.5 basis points to 6.542%. The 30-year Treasury bond fell 20/32 to 100 8/32, lifting its yield 4.6 basis points to 6.230%, the highest since Feb. 16.

At the

Chicago Board of Trade

, the June

Treasury futures contract shed 29/32 to 93 2/32.

In part, negative price action in the Treasury market has to be seen as a simple function of the fact that the Fed isn't finished raising the

fed funds rate, said Jim Glassman, an economist at

Chase Securities

.

On

Tuesday, the Fed hiked its funds rate to 6.5% from 6% and strongly hinted that additional hikes are forthcoming.

Long-maturity Treasury issues rallied that day, in a move that was explained as reflecting confidence that the Fed's actions on short-term rates would have a beneficial effect on inflation over the long term, making long-term investors willing to settle for lower yields.

Today's action (and

yesterday's) exposes that explanation as so much bunk, Glassman says. "No matter what they tell you about how the markets love tightening because it makes them comfortable that the Fed is fighting inflation, when they raise rates, rates go up," he said.

The fact that people disagree about how much higher the funds rate will go means market rates have to err on the high side, Glassman added. "At the end of the day what we know is that rates are going higher, and that's the problem."

Today, that general unwillingness to own bonds manifested itself somewhat paradoxically. It sent money cascading into the Treasury bill market, deeply depressing yields there. For example, the three-month Treasury bill, which ended yesterday at a yield of 6.041%, ended today at 5.915% after trading at a yield as low as 5.847%.

The action is unusual because normally, bill yields stay closer to the fed funds rate. In this case,

IFR

managing analyst Ken Logan said, investors are willing to pay up for Treasury bills in order to avoid owning longer-term instruments, whose prices fall further when their yields rise.

Investors are "hiding out, expecting higher rates down the road," Logan said. "That's sending a torrent of money into the bill market, which deprives the rest of the market of buying interest. Cash is king right now."

Meanwhile, the Treasury Department completed its fifth buyback operation today, accepting dealer offers on $2 billion of 30-year bonds issued from 1985 to 1989. But the market weakened after the 11 a.m. EDT operation, Logan said, because at least several dealers were left holding bonds they had expected to sell. "You had to be very aggressive in pricing to have orders taken," he said. "A lot of shops didn't sell anything."

Economic Indicators

In economic news, the weekly count of

first-time claims for unemployment insurance fell back to 276,000 from 297,000. The series hit a 27-year low of 258,000 in mid-April.

The

Philadelphia Fed Index rose more than expected to 20.2 in May from 12.8 in April, but a sub-index measuring prices paid by Philadelphia-area manufacturers fell slightly to 31.4 from 33.5.

The

federal budget report for April indicated a surplus for the primary tax-payment month of $159.5 billion, compared to $113.5 billion last April. For the fiscal year to date, the government has a surplus of about $124 billion, compared to $65 billion through the first eight months of fiscal 1999. It is forecast to finish fiscal 2000 with a surplus of at least $142 billion, vs. $124 billion in fiscal 1999.

Finally, the

Federal Open Market Committee released the

minutes of its March 21 meeting. The most interesting disclosure was that the committee took into account "somewhat unsettled financial markets" in its decision to hike the funds rate by 25 basis points rather than 50 at that meeting.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 108.60 yen, down from 109.30. The euro was worth $0.8943, down from $0.8951. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

rose to $30.33 a barrel, the highest since March 17, from $29.32.

The

Bridge Commodity Research Bureau Index

rose to 222.01, a two-year high, from 220.66.

Gold for June delivery at the

Comex

slipped to $273.70 an ounce from $273.80.