With fundamental and technical factors firmly in place. Treasury market analysts expect the yield on the long bond to trade below 6% by the end of September.
The 30-year long bond ended Friday's session down % point, to yield 6.13%.
The bright inflation picture and sluggish economy have fueled a powerful bond market rally in recent weeks and pushed long bond yields to their lowest levels since the Treasury Department began auctioning 30-year issues on a regular basis in 1977.
But the outlook for growth and inflation is even more supportive to the market, analysts say, noting a number of factors. One of the most compelling is President Bill Clinton's deficit reduction package, which many believe will weaken the economy in coming quarters. Other factors include the weak labor market, widespread military base closings, weak economies abroad, and a general lack of upward price pressures in the U.S. economy.
Against this backdrop, market observers say that no formidable barriers stand between the long bond and lower yields.
"The market is still in good shape and we're headed toward lower rates," said Charles Lieberman, director of financial market research at Chemical Securities.
Market observers were not particularly concerned about the losses posted Friday. Traders attributed them to pre-weekend profit-taking and said that after the recent run-up in prices and drop in yields, the move to book profits was natural and did not hamper, the outlook for lower long-term rates.
"The rally was impressive and powerful but it began to get ahead of itself and we had some consolidation," said David Jones, chief economist at Aubrey G. Lanston & Co.
Jones believes the yield on the long bond will hit 5 3/4% in the near term. "The fundamentals are still there in terms of the 30-year bond," he said. "I expect the bond to hit 53/4% by the end of September, with all of the positive factors we're seeing still in place."
Matthew Alexy, senior market strategist at First Boston, also subscribes to the slow growth scenario. He expects the yield on the 30-year bond to hit 5.95% by the end of September, basing his prediction on anecdotal evidence of weakness in the economy, and lack of upward price pressures.
Recent comments from Federal Reserve officials paint a similar picture of the economy. On Friday, a wire service report quoted Fed Board Governor Susan Phillips as saying that there is reason to be encouraged on the U.S. inflation front, and that a slow growth scenario is most likely in the near term.
Phillips said there is a good chance the Fed will make some progress on inflation this year amid an economy still undergoing downsizing and corporate restructurings.
That belief underscores what is perhaps one of the most stirring realizations among market participants. Many are coming around to the view that current long-term rate levels are true, and not merely brought on by some aberration or short-lived bull market.
"Rates at these levels are not a sign that the economy is bubbling and they reflect extreme weakness." said Donald Fine, chief market analyst at Chase Securities, noting his belief that the long bond will break below 6% in the next two weeks.
Fine said the economy's performance thus far this year "can only be characterized as disappointing." While economic growth continues to move forward, he said, the pace is far too slow.
Among the reasons Fine cites for this period of lackluster performance are: the restructuring of the American economy that resulted in corporate cost curtailment and the substitution of lower cost capital for higher labor cost; uncertainty about the general trend of business activity in addition to fears of higher taxes; more government regulation of health care and impending reform; the continuing scaleback of the defense industry; residual effects of overzealous banking regulation; and a distinct lack of innovative new products.
"These key factors have acted in concert over time to hinder employment growth, stymie business planning and expansion, crimp credit extension, and create a pall over consumer confidence and spending," Fine said.
Treasury Market on Friday
Treasury note and bond prices got off to a weak start Friday as selling in overseas trading was met with profit-taking at the start of the New York session. Many participants used the move lower as an excuse to book profits.
After the initial sell-off, prices were steady at lower levels through the morning as a lack of fresh news gave participants little incentive to enter the market.
Most accounts pulled to the sidelines through the morning as no news arose to provide them with reasons to trade. In addition, many are awaiting next week's barrage of economic indicators, which will let the market know if the rally will continue or if a correction is warranted.
Of particular interest next week will be Friday's employment report, which will provide the market with its, first comprehensive view of the economy's performance in August.
"The market needs some direction at this point," one head trader said. "We're at lofty price levels and people want to make sure fundamentals are still behind us."
In futures, the September contract ended down 12/32 to 119.10.
In the cash markets, the 37/8% two-year note was quoted late yesterday down 4/32 at 99.30-99.31 to yield 3.89%, the 43/4% five-year note ended down 10/32 at 99.17-99.19 to yield 4.83%, the 53/4% 10-year note was down 20/32 at 101.29-101.31 to yield 5.49%, and the 61/4% 30-year bond was down 22/32 at 101.18-101.20 to yield 6.13%.
The three-month Treasury bill was up one basis point at 3.04%, the six-month bill was up one basis point at- 3.13%, and the year bill was up five basis points at 3.27%.Treasury Market Yields Prev. Prev. Friday Week Month3-month Bill 3.08 3.06 3.086-Month Bill 3.20 3.19 3.271-Year Bill 3.37 3.38 3.512-Year Note 3.87 3.96 4.113-Year Note 4.20 4.35 4.405-Year Note 4.83 5.04 5.147-Year Note 5.08 5.34 5.4410-Year Note 5.48 5.70 5.8030-Year Bond 6.12 6.34 6.56Source: Cantor, Fitzgerald/Telerate
