The Treasury market continued to rally yesterday as more weak economic statistics and forecasts of a feeble nonfarm payrolls reported tomorrow got traders excited about the prospects of another Fed easing.
The favorable news for bonds included a downward revision to third-quarter output and a downbeat "beige book" from the Federal Reserve. The bill sector got an extra boost from the news that the Soviets were suspending some debt payments.
The dismal reports about the U.S. economy added to the market's conviction that the Federal Reserve will have to cut short-term rates again, probably after the November employment report tomorrow.
By late yesterday, the 30-year bond was up 1/2 point, to yield 7.84%. Intermediate securities outran the rest of the market, with the 10-year note closing 5/8 point higher, to yield 7.18%.
The rally started yesterday morning after the Commerce Department's gross domestic product report showed more weakness than expected.
Gross domestic product is the government's newly adopted measure of output. It tracks production within the United States; the gross national product that was used previously counted output produced by U.S. citizens and capital at home and abroad.
Third-quarter GDP rose 1.7%, down from 2.5% gain originally reported. And the old measure of output, GNP, was revised down to a 2.0% third-quarter gain from the 2.4% increase originally reported.
The market expected third-quarter output to be revised up to 2.9%, so the downward revisions to both measures were good news.
But analysts said the more important
Treasury Market Yields
Prev. Prev.
Wednesday Week Month
3-Month Bill 41.42 4.49 4.77
6-Month Bill 4.45 4.59 4.90
1-Year Bill 4.56 4.71 4.94
2-Year Note 5.21 5.41 5.62
3-Year Note 5.56 5.77 5.95
4-Year Note 5.67 5.87 6.04
5-Year Note 6.28 6.52 6.70
7-Year Note 6.72 6.99 7.14
10-Year Note 7.18 7.40 7.50
15-Year Bond 7.54 7.74 7.81
30-Year Bond 7.84 7.96 7.99
Source: Cantor, Fitzgerald/Telerate
news for the bond market was that much more of the third quarter's strength came from inventories, while final sals, a measure of demand, were weaker than originally thought.
If inventories built up during the third quarter, that could depress production during the fourth quarter.
"Inventory growth, if you're going into a dismal Christmas season, could be a real problem," said Steven Ricchiuto, an economist at Barclay de Zoete Wedd Government Securities.
"The basic analysis just shows the economy remains weak," a government bond trader said. "And as long as the data show that, the front end will trade as if the Fed is going to continue to ease forever."
The Federal Reserve's beige book, which summarized regional reports on economic activity, read along the same lines as the GDP data.
The Fed's report said the recovery's momentum was "flagging," with the housing sector growing slowly, manufacturing activity leveling off, and retail sales still sluggish.
"The beige book told us what national economic statistics have been telling us for some time," said Steven Wood, director of financial markets research at Bank of america. "The spurt in economic activity in the late spring and most of the summer has completely dissipated."
Meanwhile, the bill sector benefited from a flight to quality on yesterday's report that the Soviets would temporarily halt principal payments on their foreign debt. The Soviet state bank, Vneshekonombank, said it will still make interest payments.
Traders said, though, that the real star yesterday was the intermediate sector, with demand reported to be strong for five-year, seven-year, and 10-year notes.
"Fives, sevens, and 10s actually outperformed the bonds and did a little bit better than the short coupons as well," said Scott Winningham, chief market analyst at Stone & McCarthy Research Associates. "It could be that investors are extending out from twos and threes."
The intermediate sector has been popular in recent months because investors extending the duration of their holdings have tended to stay inside of 10 years. And there were reports yesterday that the intermediate sector was benefiting as investors moved money out of mortgage-backed securities and into the Treasury market, perhaps because of worries about mortgage prepayment rates.
In the only vestige of economic strength reported yesterday, late-November car sales posted big gains over the sales in the same period last year. But analysts said previous year's sales were at unusually low levels and the 6.3 million sales rate for late November was nothing to write home about.
No matter how weak yesterday's statistics were, Friday's November employment report is still the key.
"If we are going to get any sort of reaction out of the Federal Reserve, it's likely to be in response to Friday's numbers," Mr. Wood said.
He expects a 50,000 decline in November payrolls and said the Fed would probably cut the funds rate 25 basis points on that kind of report.
"From a chart-watching point of view, it's going to be interesting," Mr. Winningham said. "We're sitting right near the highs of the year so far, so we'll either get a double top or an upside explosion."
The March bond future contract closed 3/4 higher at 100 6/32.
In the cash market, the 30-year 8% bond was 9/16 higher, at 101 20/32-101 24/32, to yield 7.84%
The 7 1/2% 10-year note rose 19/32, to 102 3/32-102 7/32, to yield 7.18%.
The three-year 6% note was up 1/8, at 101 3/32-101 5/32, to yield 5.56%.
Rates on Treasury bills were lower, with the three-month bill down four basis points at 4.32%, the six-month bill off four basis points at 4.31%, and the year bill four basis points lower at 4.37%.
