Treasury market participants expect to find many of the answers they seek about the economy in today's employment report for October.

The big question is whether the low level of interest rates -- which have finally given sectors of the economy a boost -- is translating into stronger job growth.

Investors have received a number signs recently that the U.S. economy is gaining steam and -- spooked by widespread forecasts for significantly stronger growth through the end of the year --market players are curious to see where the employment sector fits in.

The jobs release, which will provide players with their first comprehensive view of the economy's performance last month, will either lend support to the market or hurt it, participants said.

Economists polled by The Bond Buyer generally expect non-farm payrolls to increase by 150,000 in the month and the credit markets have already priced in an increase in that neighborhood. Any significant deviation from that level is likely to prompt a significant reaction.

"No one is taking a big stand going into the jobs report," said Matthew Alexy, senior market strategist at CS First Boston Corp. "The market is trying to strike an equilibrium and people are getting yield curve neutral."

An increase in non-farm employment of less that 150,000 is likely to calm the market's fears that the economy is heating up, observers said. But a higher than expected increase in payrolls is likely to drive prices lower as many long-term players sell their positions. Should the report come in as expected, market players expect yields to remain at current levels as the market searches for other clues on the economy.

Jay Goldinger, chief investment officer at Capital Insight Inc. in Los Angeles, said many accounts are not taking chances. He said many players have bought put options in recent session which allow them to sell securities at an agreed upon price, in expectation of falling prices.

"Sentiment is negative and the market is very nervous," Goldinger said. "I think the market would rather be safe,than sorry later."

The benchmark bond ended sharply lower as uncertainty ahead of the October employment report turned yesterday's session into a seller's market.

The 30-year bond ended almost onepoint lower to yield 6.18%.

Few accounts were willing to enter the market ahead of the jobs statistics, and a lack of buyers enabled prices to drift lower throughout the session.

The short end outperformed the rest of the curve due to the unwinding of curve-flattening trades and a general belief that the front end was oversold earlier in the week.

Shorter-dated Treasuries were viewed as safer investments than the long end because they have been less volatile in recent sessions. The bill sector benefited from a flight to quality yesterday as rising bond yields scared the stock market and prompted a move into short-dated Treasury paper.

The long end continued to lag the rest of the market due to the defensive move into the short end. The bond futures contract crashed through key support, which compounded the bearish tone. The December futures contract ended down 3/4 of a point.

Selling occurred as some players moved in on the yield curve. and others sold the 30-year bond in reaction to rising gold prices. A number of traders said speculative accounts have been buying the gold futures contract in recent sessions, which has driven precious metals prices higher.

Tony Crescenzi, head trader at Miller, Tabak, Hirsch & Co., said volume slowed considerably going into the employment report, noting that the only players active in the market yesterday were day-traders and a few accounts setting up for the employment statistics.

"There's a lot of anxiety in the market and people have taken a wait-and-see approach," he said.

The market managed to ignore the Labor Department's report that jobless claims fell 10,000 to 337,000 for the week ended Oct. 30.

Instead of trading lower on the statistics, traders said the market found support from some position-squaring by shorts and yield-curve trades ahead of today's employment report.

But accounts used the uptick in prices as an excuse to sell and the market never recovered.

The market remains extremely vulnerable to any signs of strength in the economy and players believe a strong employment report could very well put the last nail in the market's coffin.

"A decent jump in jobs would do a job on the market and certainly send prices lower," Crescenzi said. "Employment growth would bring the market's recent rally to a grinding halt."

Late yesterday, the Federal Reserve reported its-weekly money supply fuiures. In the week ended Oct. 25, M1 fell $2.2 billion, M2 fell $5.9 billion, and M3 rose $1.5 billion.

In futures, the September contract ended down 24/32 to 115.27.

In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 2/32 at 99.15-99.16 to yield 4.14%, the 4 3/4% five-year note ended down 6/32 at 99.20-99.22 to yield 5.05%, the 5 3/4% 10-year note was down 12/32 at 100.13-100.17 to yield 5.67%, and the 6 1/4% 30-year bond was down 31/32 at 101.26-100.30 to yield 6.18%.

The three-month Treasury bill was up one basis point at 3.08%, the six-month bill was up one basis point at 3.26%, and the year bill was unchanged at 3.41%.Treasury Market Yields Prev. Prev. Thursday Market Month3-Month Bill 3.08 3.04 2.986-Month Bill 3.26 3.18 3.081-Year Bill 3.41 3.33 3.212-Year Note 4.14 3.95 3.803-Year Note 4.40 4.19 4.095-Year Note 5.05 4.80 4.687-Year Note 5.26 4.95 4.8810-Year Note 5.67 5.42 5.3130-Year Bond 6.18 5.94 6.00Source: Cantor, Fitzgerald/Telerate

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.