Bad things happen in threes. The old adage certainly proved true in the Treasury market yesterday when three factors conspired to push prices lower.
The culprits were rumors, technicals, and fundamentals. The bad news trio pushed government securities lower. The 30-year bond ended down more than 3/4 of a point, to yield 6.23%.
Selling began at the start of New York trading as the Labor Department reported a sharp decline in initial weekly jobless claims.
Claims fell 20,000 to a level of 338,000 in the week ended November 13. The drop was much larger than market analysts had anticipated and prompted investors to liquidate long positions.
A report on the manufacturing sector of the economy dished up even more indigestion for the bond market. The Philadelphia Federal Reserve's index of manufacturing activity rose to 22.4 in November from 15.1 in October, extending the positive trend in the manufacturing sector of the economy.
Market economists said the Philadelphia Fed's index confirmed the pickup in manufacturing employment seen in the October jobs report and, coupled with the recent down-draft in inventories, bodes well for future job growth.
Next came an unrelated sell-off in the futures market in response to a rise in the Commodity Research Bureau's index of commodity prices. The CRB hit a new three-year high at 223.75 yesterday, taking out the early August peak. Higher prices in imports, metals, and meats combined to push the closely watched index up.
The third factor was unsubstantiated rumors that the Treasury Department is considering reopening the current 30-year bond to address the growing scarcity of the issue. The market chatter gained some credibility from participants who had speculated that the benchmark bond was the subject of a repo market squeeze.
"A combination of these things has reinforced the bearish trend in the market," said William Sullivan, director of money markets research at Dean Witter Reynolds Inc.
The economic fundamentals continue to bear the mark of recovery, and the market doesn't like it, observers said. Pervasive signs of growth have put fixed-income investors on the defensive in recent weeks and placed the spotlight on every stitch of economic news -- even reports that historically have held little significance for Treasuries, observers said. Therefore, the market remains extremely vulnerable to hints of strength, as was the case yesterday.
"The manufacturing sector has caught gear and so has the housing market," said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. Wesbury said signs of growth in several sectors -- including housing, employment, and manufacturing -- indicate that interest rate sensitive areas of the economy are gaining steam.
The near-term technical outlook is similarly grim for the U.S. bond market. Technicians have begun forecasting a sharp correction in commodity futures, a trend which is likely to spill over into the treasury cash and futures markets. Of particular concern to investors in fixed-income debt are persistent upward pressures in the prices of gold, oil, lumber, and a number of other commodity futures contracts.
Chicago-based technical analysts interviewed yesterday agreed that the CRB index has reached a zenith in its recent trading range and may be poised for a break to the upside. Analysts agreed that a break above longstanding resistance levels would be a dangerous development for the Treasury market.
"People in the cash market cannot ignore what's happening in the area of commodity prices," said one technical analyst at a Chicago-based futures research firm. "The CRB is bearing the signs of trouble for the long end of the curve."
The short end of the curve has had its share of trouble this week as the market enters into a period of supply. The burden of supply will be felt by the short and intermediate sectors next week as the Treasury holds its monthly note auctions.
Ratification of Nafta by the U.S. House of Representatives last night was viewed as favorable for the U.S. economy as well as for the bond market, as it will probably liberalize international trade and help the overall inflation picture.
But a negative side effect for the short end of the market is the treaty's potential impact on U.S. monetary policy. Market participants believe that Nafta will gradually stimulate the North American economies and reduce the Fed's ability to hold interest rates at low levels. "Nafta probably means the next move in interest rate policy will be towards restraint and not ease," said Dean Witter's Sullivan.
Late yesterday, the New York Fed reported its weekly money supply figures. In the week ended November 7, MI was unchanged, M2 rose $10.9 billion, and M3 rose $12.1 billion.
In futures, the December contract ended down 14/32 to 116.06.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 5/32 at 99.16-99.17 to yield 4.12%. The 43/4% five-year note ended down 13/32 at 98.19-99.21 to yield 5.06%. The 53/4% 10-year note was down 21/32 at 100.06-100.10 to yield 5.70%, and the 6 1/4% 30-year bond was down 26/32 at 100.03-100.07 to yield 6.23%.
The three-month Treasury bill was up two basis points at 3.11%. The six-month bill was up two basis points at 3.25%, and the year bill was up three basis points at 3.45%. Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.11 3.12 3.056-Month Bill 3.25 3.27 3.151-Year Bill 3.45 3.40 3.272-Year Note 4.12 4.14 3.843-Year Note 4.47 4.51 4.125-Year Note 5.06 5.06 4.707-Year Note 5.26 5.27 4.8910-Year Note 5.70 5.68 5.3230-Year Bond 6.23 6.20 5.91Source: Cantor, Fitzgerald/Telerate
