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Bonds recoil from auction
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February 10, 1999: 3:47 p.m. ET
Haven buying dries up as tepid 10-year sale deflates market's spirits
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NEW YORK (CNNfn) - U.S. Treasury prices were substantially lower after a jagged day on Wall Street and an uninspiring $10 billion auction of 10-year notes failed to rally bond traders' fragile confidence.
At 3:00 p.m. ET, the benchmark 30-year Treasury bond was down 11/32 of a point at 98-28/32, while the yield climbed up to 5.32 percent.
A day after their own refunding auction, five-year notes also slipped, falling 7/32 to 99-27/32, while the yield climbed to 4.81 percent.
Traders said the market had ignored a mixed bag of economic data released in the morning, concentrating instead on the afternoon's $10 billion Treasury refunding.
"Economic data had no impact on the market," said Robert McCool, senior trader at First Chicago. "The only event, and what the market is really focused on today, is the $10 billion in new 10 year securities coming to market."
Refunding lackluster
The Treasury reopened last November's offering of 10-year notes in a lackluster auction that traders had expected to be somewhat "sloppy" due to a lack of time to prepare.
Up until 9:00 a.m. ET, there was still a slim chance that the refunding would actually be a sale of a new 10-year issue, forcing investors to plan for either scenario.
The 9-3/4 year notes priced at a high yield of 4.913 percent, the highest pricing yield for debt with a 10-year face maturity since the August issue. The auction price was set at 98-23/32.
Demand was robust compared with Tuesday's 5-year auction, with 2.04 times as many bids submitted as there were notes available.
Traders said a substantial portion of the bids were coming from Wall Street investors disturbed by recent convulsions in the U.S. stock market.
Although this initially led many players to look forward to even better interest in Thursday's $10 billion auction of fresh 30-year bonds, analysts warned that Wall Street's diffident flight to safe-haven bonds had done little to support the retail debt market.
"Bonds are looking at equities," said Michael Cloherty, bond market strategist at CS First Boston. "The equity market has stabilized after yesterday's tumble and the auction lends a negative backdrop because the market has to absorb more supply."
Still, Cloherty said selling volume in the bond market was slim, about 29 percent lighter than the average first-quarter Wednesday of 1998.
Following Japan
Japanese long-term interest rates continued to play a key role in not only the day's bond trading but the global currency market as well.
Dennis Hynes, chief bond market strategist at R.W. Pressprich, said that a glut of Japanese government bonds would help keep Treasury yields high.
"(Treasury Secretary) Rubin has suggested that . . . (Japan) monetize their debt, which means to print money," he said. "If that should happen, we're going to have people sell their dollar-denominated assets and bonds and then buy theirs. That means repatriation."
Traders said speculation that the Bank of Japan will revive demand for Japanese bonds by buying up the existing supply did in fact encourage global investors to buy yen, pushing the dollar off its trading highs.
By 3:00 p.m. ET, the dollar was at 114.38 yen, only slightly ahead of its previous close of 114.02 but still well off its session peak of 115.52.
The euro remained firm against the greenback, climbing to $1.1346 from its previous close of $1.1316.
Hynes attributed the dollar's staying power to perceptions that U.S. bond yields will rise to compete with the new demand for Japanese debt.
Growing clamor for the Bank of Japan to decrease Japan's already record-low interest rates at its policy meeting Friday also supported the dollar, particularly in light of speculation that the Federal Reserve may now be leaning toward raising rather than lowering U.S. rates.
Hynes pointed to the 10-year auction as an indicator of where Fed monetary policy may be headed.
"Often times the 10-year . . . is indicative as to where interest rates are going in the intermediate term or even longer term," he said. "There's been a perception change and a change in concern -- where there was a concern about a weakening economy, now we believe that the concern has shifted to a strength in the economy."
Forward-looking indicators
Ahead, Hynes said interest rates could go higher in the middle term, particularly after strong employment figures pushed the long bond yield above 5.30 percent last week.
As to the outlook for Treasury yields, he again pointed to Wednesday's 10-year refunding auction as a test case.
"The 30-year (yield) basically gets to 5.50 percent sooner or later if the 10-year closes above 5 percent today," he said. "If the 10-year closes below 4.88 percent today after the auction, then we would tell people to delay (short-selling) tactics until we get this corrective rally to exhaust itself."
Influential Wall Street analyst Ralph Acampora startled some market watchers Tuesday by predicting the 30-year yield will rise as high as 6 percent if it touches 5.4 percent in the near term.
By 3:00 p.m. ET the 10-year note was down 2/32 at 98-30/32, yielding 4.88 percent. 
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