The shocking drop in Novembre nonfarm payrolls pushed Treasury prices higher Friday, but profit taking whittled away a big chunk of the gains before the session's close.
The 30-year bond ended 1/2 point higher, where it yielded 7.79%, after having been up as much as 1 3/8 points during the morning.
As expected, the dismal jobs data resulted in another 25-basis-point cut in the fed funds rate, to 4 1/2%, and many analysts said another Fed easing is possible before the end of the year, given the weakness in the employment statistics.
Friday's rally began overseas as foreign investors reacted to Treasury Secretary Nicholas Brady's remark late Thursday that the Treasury was considering shifting some debt issuance toward the short end of the curve.
Treasury Market Yields
Prev. Prev.
Friday Week Month
3-Month Bill 4.33 4.46 4.74
6-Month Bill 4.37 4.55 4.86
1-Year Bill 4.49 4.66 4.93
2-Year Note 5.16 5.36 5.60
3-Year Note 5.51 5.73 5.95
4-Year Note 5.64 5.83 6.04
5-Year Note 6.27 6.47 6.65
7-Year Note 6.73 6.94 7.06
10-Year Note 7.22 7.36 7.40
15-Year Bond 7.49 7.70 7.71
30-Year Bond 7.79 7.93 7.87
Source: Cantor, Fitzgerad/Telerate
That news pushed the 30-year
bond 3/4 higher before the jobs report
came out, and the entire market
rallied on the news that November
payrolls had fallen 241,000. The
market had expected only a
40,000-job decline.
October's payrolls level was revised
to a 4,000 increase from the
1,000 decline originally reported.
The market focused on the payrolls
number rather than the
steady 6.8% unemployment rate
because it is regarded as a more accurate
indicator.
Some analysts said a number of
special factors exaggerated the
weakness in November.
The 95,000-job loss in construction
was partly attributable to bad
weather in the Midwest, and retail
employment fell 111,000 because
of a sharp decline in the amount of
Christmas hiring by all types of
stores, an effect that will be reversed
after the holidays.
And Janet Norwood, the commissioner
of the Bureau of Labor Statistics,
said changes made in the
seasonal factors were responsible
for some of the weakness; without
those changes, payrolls would have
fallen only 170,000, she said.
But a number of economists said
even after those explanations, November's
report looked weak.
"In an economic recovery, payrolls
are supposed to be up
170,000, not down 170,000," said
Paul Kasriel, a monetary economist
at Northern Trust Co.
Mr. Kasriel said the single most
telling number in the report was
the 33,000 decline in manufacturing
employment.
"Manufacturing had been the
one bright light in the economy and
it's going out," he said. "The economy
is flirting with slipping back
into recession."
The Fed's quick reaction indicated
it was cncerned. Analysts said
the Fed's customer repurchase
agreements Friday translated into
a 25-basis-point cut in the funds
rate, and many expect another
round of easing before yearend.
Long-term prices came off their
highs fairly quickly Friday and
traders said some retail and speculative
accounts decided to sell securities
to take profits, since the end
of the year is now in sight.
"The street saw a great number,
pushed the market to the moon,
and there were no buyers," a salesman
said.
Once the buying stopped, profit-taking
took over, and the situation
was exacerbated by the relatively
thin December market, he said.
"Traders at most primary dealers
get their bonuses in January and
February, so they don't take risks
in December," the salesman said. "So
there's no liquidity."
Peter Mayers, assistant treasurer
at Bank Julius Baer, said the intermediate
sector, which had been the
star performer for most of the week,
put in the worst performance
Friday.
"Basically both ends did better
than the middle," Mr. Mayers said. "I
think a lot of that has to do with
people who were in spread trades,
who were short the long bonds and
long intermediates."
That had been a profitable trade,
since the intermediate sector was
booming and long-term prices were
stuck in the mud. Buat after Mr. Brady
talked about reducing long-term
issuance, investors got scared
about being short long-term paper
and rushed to take off their spread
trades by buying bonds and selling
intermediate paper, Mr. Mayers
said.
Short-term prices held onto their
gains best Friday, and he said the
profit taking may have been fiercer
at the long end because that sector
had seen the biggest price improvement
early in the day.
The question of changes to the
Treasury's bond auctions may continue
to affect the long end.
When long-term yields failed to
make much headway over the last
two months, some economists suggested
that the Treasury eliminate
or reduce the supply of bonds in order
to lower yields and stimulate
the economy.
But it was unclear from Mr. Brady's
polite response to a congressman's
query Thursday how seriously
the Treasury was taking the
idea.
Traders said the most likely outcome
was a small cut in the size of
the 30-year auction.
Some analysts questioned how
much impact the move would have
on the economy and said a government
that has to finance an astronomical
deficit ought not to limit its
options.
The March bond futures contract closed at 100 16/32, up 19/32 on the day.
In the cash market, the 30-year 8% bond was 9/16 higher, at 102 8/32-102 12/32, to yield 7.79%.
The 7 1/2 10-year note closed unchanged, at 101 26/32-101 30/32, to yield 7.22%.
The three-year 6% note was up 3/16, at 101 7/32-101 0/32, to yield 5.51%.
Rates on Treasury bills were lower, with the three-month bill off 10 basis points at 4.24%, six-month bill 13 basis points lower at 4.23%, and the year bill 10 basis points lower at 4.30%.
Fed's Forex Report
U.S. monetary authorities did not intervene at all in the foreign exchange markets in the three months ending Oct. 31.
That compares with the $150 million of intervention in the previous three-month period.
Margaret Greene, senior vice president of the New York Fed, said the dollar's activity during the period ending Oct. 31 could best be described as "episodic and spotty" as it moved moderately lower.
Slower-than-expected economic growth was a large contributing factor to the decline of the dollar, according to a report issued by the New York Fed.
One of the biggest single events affecting the dollar was August's failed coup in the Soviet Union. This event caused a surge in demand for dollars, setting off a 4% rise in the dollar against the German mark. But by the time the markets opened in New York, the Soviet situation had stabilized and there was no need for U.S. intervention to lower the dollar.
The dollar floundered in late August and early September on downward revisions to second-quarter gross national product report and the July payroll data.
At the same time, the Bundesbank's tendency toward a tighter monetary policy weighed on the dollar.
The dollar got some support in early October from developments in Eastern Europe.
Also, fairly unexpectedly, some of the economic data suggested a turn for the better. But that optimism soon faded as Fed Chairman Alan Greenspan made comments about the weakness of the current economy, helping to drive the dollar lower.
At the close of the period, the dollar was 9% below its 1991 high against the German mark. Against the Japanese yen, it was more than 8% below its 1991 high.
