The alarmingly weak August employment report gave the Treasury bond rally a new lease on life Friday.
Late in the day, the 30-year bond was up close to a point and yielded 7.28%, and traders and analysts expect further gains this week.
The 83,000 decline in August nonfarm payrolls was far below the 175,000 increase that Street economists expected.
The jobs market looked even weaker when the summer jobs for teenagers created by the federal government were subtracted. The Bureau of Labor Statistics said excluding those 100,000 temporary jobs, nonfarm payrolls would have been off 183,000.
"This is not a good picture for the economy or the job market," said Michael Niemira, business economist at Mitsubishi Bank. "What you see in the totals is confirmed by all the details: weak, weak, weak."
The details included 97,000 jobs lost in manufacturing and a decrease of 71,000 in retail employment.
At the same time, July's increase in employment was revised down to 177,000 from the 198,000 reported last month. Excluding summer youth jobs, July payrolls were up only 102,000.
White House spokesman Marlin Fitzwater said the decline in the unemployment rate to 7.6%, from 7.7% in July, was encouraging. But economists disagreed with his interpretation and said the rate improved only because the size of the work force declined more than the number of jobs.
Some analysts were disturbed by a couple of other components of the jobs report that showed strength: average hourly earnings rose seven cents, to $10.65, and the workweek rose to 34.7 hours from 34.3 hours in July.
"It was a crazy set of numbers," said William Griggs, a managing director of Griggs & Santow Inc. "The employment side looks like a doomsday scenario, but if you look at hours worked and earnings, they say [the gross domestic product] is going to grow more rapidly."
Mr. Griggs said the report leaves the market" with a better price picture, but no confidence in what's happening" in the economy.
He said, though, that consumer confidence, one of the keys to getting the economy back on track, is not likely to improve when consumers see this kind of jobs data. "And these numbers will not go out of anybody's mind, the Democrats will see to that," he added.
Jan Hurley, a senior market strategist at Chase Securities, said inconsistency in the jobs report was one reason not to interpret it as a signal the economy is going to go back into recession.
"It's a dismal report," she said, but "we're not going to have a triple dip."
The Federal Reserve responded to the jobs report by cutting its funds target 25 basis points, to 3%. That disappointed traders who were hoping for a repeat of the Fed's matching half-point cuts in both the discount and funds rate after the big drop in June payrolls.
Some traders are still hoping for a cut in the discount rate this week, though.
Treasury prices ended Friday's shortened session with most of the day's gains intact.
Traders said not much happened in the market after the initial jump on the numbers, which was almost instantaneous.
Most of the buying was done by professionals. Retail interest was sparse, although some investors reportedly were moving money out the curve.
"What we saw were some attempts at buying right after the number," a note trader said. "Once the market popped, we saw some people taking profits."
The market's gains were lopsided, with the short end racing ahead of the long end in anticipation of the Fed's rate cut.
Late in the day, the 30-year bond was yielding 343 basis points more than the two-year note, up from the 329 basis point spread late Thursday.
"I don't see the reason for the curve to be as steep as it is," Ms. Hurley said. "But the things that could go wrong near-term are things that would hurt long end more than short end."
Potential problems for the long end include the dollar, although it performed relatively well Friday in the face of the employment report and the Fed rate cut. Late in the day, it was quoted at 1.4015 marks, down from 1.4150 late Thursday.
Traders agreed that the market was basically in good shape, but cited a couple of other problems heading their way.
The big corporate and municipal new-issue calendar's reminded some participants of the market's problems in January, when a supply logjam in the corporate market weighed on Treasury prices.
And some said political uncertainty would be another factor in the weeks ahead because the jobs report looked like another blow to President Bush's chances for reelection.
The increased likelihood of a Clinton presidency, or more talk by President Bush about fiscal stimulus programs, could be disturbing for the long end.
A bond trader argued that the positive economic fundamentals, including the jobs statistics and the prospect of a good producer price report Friday, would win out in the end, and said retail investors' tendency to extend the maturity of their holdings was a good omen for long-term prices.
Even though the 30-year bond ran into resistance at 7 1/4% on Friday, "I don't see what's special about 7 1/4% or 7%," the trader said. "It seems to me you'll have a six handle, maybe in the next week or so."
"It just doesn't get any better than this for the long end," he added.
The December bond futures contract closed 1 1/4 point higher t 105 30/32.
In the cash market, the 7 1/4% 30-year bond was 29/32 higher, at 99 16/32-99 20/32, to yield 7.28%.
The 6 3/8% 10-year note rose 30/32, to 99 25/32-99 29/32, to yield 6.38%.
The three-year 4 5/8% not was up 19/32, at 100 24/32-100 26/32, to yield 4.32%.
Rates on Treasury bills were lower, with the three-month bill down 21 basis points at 2.92%, the six-month bill off 22 basis points at 2.97%, and the year bill 22 basis points lower at 3.07%.
Treasury Market Yields
Friday Week Month
3-Month bill 2.09 3.21 3.19
6-Month Bill 3.03 3.33 3.26
1-Year Note 3.16 3.45 3.39
2-Year Note 3.85 4.15 4.13
3-Year Note 4.32 4.68 4.57
5-Year Note 5.28 5.60 5.54
7-Year Note 5.85 6.15 6.04
10-Year Note 6.38 6.62 6.54
30-Year Bond 7.28 7.42 7.39
Source: Cantor, Fitzgerald/Telerate