Treausry note and bond prices lost a little ground yesterday as dealers tinkered with their positions ahead of tomorrow's August employment report.
Late in the afternoon, the 30-year bond was off almost 1/4 point and yielded 8.05%.
The jobs report is even more important than usual this month because recent economic indicators have swung wildly between strength and weakness, leaving traders confused about the state of the economy.
The surge in July durable goods orders and the robust gain in the August purchasing managers' report cast doubt on expectations that the Fed would have to loosen credit again to keep the recovery going. Still, most traders are betting the Fed will ease given a sufficiently weak employment report.
There was no economic news released at all yesterday, and absent that stimulus, Treasury trading was limited to position-squaring by dealers and some buying by retail investors, traders said.
"It's a tug of war between natural profit-taking and scaling down positions in front of the nonfarm payroll numbers and people who think it's an opportunity to do some buying on dips," said a trader who deals in bond futures contracts.
"We had some long liquidation," said Mike Krauss, a technical analyst at Lehman Brothers. "People are starting to put on some defensive-type traders, given the over-bought conditions."
The market is approaching a key technical support level at 96 29/32 on the December bond futures contract, but it is not likely to test that level until after the jobs data, Mr. Krauss said.
"We'll remain range bound until [tomorrow] and then we'll take our clue from the employment number," he said.
Prices improved overnight in London on some buying related to new eurobond issues and the news that the Bank of England had cut its base rate by a half point, to 10 1/2%, traders said.
Long-term prices gave back those small gains during the New York morning session, but the short end held its ground longer amid speculation about a Fed easing.
Traders said a report from the Washington consulting firm of Johnson Smick International has increased the talk yesterday about a possible Fed move, although few seemed to place much credit in the firm's forecasting ability.
Johnson Smick reportedly said Fed Chairman Alan Greenspan has the votes to ease again and is just waiting for the right opportunity.
Jerry Gluck, a Fed watcher at Mitsubishi Bank, said there was nothing new in that outlook.
"It's generally perceived that the Fed does want to ease, but they need an excuse to do it," Mr. Gluck said. "The obvious excuse would be a weak jobs report."
Economists surveyed by The Bond Buyer on average expect a 25,000 increase in August nonfarm payrolls, following the 51,000-job loss in July. Estimates range from a 45,000 decline to a 90,000 increase.
Mitsubishi's forecast of a 50,000 gain in payrolls and a 0.2% increase in hours worked is toward the high end of the range of expectations. The combination would probably bar a Fed move, Mr. Gluck said.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 5.47 5.44 5.53
6-Month Bill 5.59 5.52 5.67
1-Year Bill 5.68 5.64 6.83
2-Year Note 6.27 6.29 6.53
3-Year Note 6.62 6.62 6.89
4-Year Note 6.78 6.77 7.00
5-Year Note 7.30 7.29 7.50
7-Year Note 7.63 7.62 7.78
10-Year Note 7.80 7.80 7.95
20-Year Note 7.99 7.97 8.15
30-Year Note 8.05 8.05 8.17
Source: Cantor, Fitzgerald/Telerate
Yesterday afternoon, traders watched the wire service reports on the House Energy and Commerce subcommittee hearing on Salomon, which featured appearances by the firm's interim chairman, Warren Buffett, New York Fed President Gerald Corrigan, SEC Chairman Richard Breeden and Federal Reserve Vice Chairman David Mullins.
"Everybody's fearful of more government intervention or regulation," the futures trader said.
Fed funds traded as high as 6 3/4% yesterday because of settlement day pressures and analysts said the Fed's adding reserves with overnight system repurchase agreements was an effort to deal with the high funds rate and had no policy significance.
The December bond future contract closed 3/32 lower at 97 8/32.
In the cash market, the 30-year 8 1/8% bond was 3/16 lower, at 100 21/32-100 25/32, to yield 8.05%.
The 7 7/8% 10-year note fell 1/8, to 100 11/32-100 15/32, to yield 7.80%.
The three-year 6 7/8% note was down 1/32, at 100 19/32-100 21/32, to yield 6.62%.
Rates on Treasury bills were mixed, with the three-month bill one basis point lower at 5.33%, the six-month bill down two basis points at 5.37%, and the year bill steady at 5.39%.