Short-term Treasury prices rallied Friday on concern about a proposed limit on credit card rates and news that consumer sentiment slipped in early November.
And late in the day, the dramatic slide in stock prices added to the short end's gains and brought the lagging long and end back to Thursday's closing levels.
The 30-year bond closed 1/16 lower to yield 7.81%, while short-term notes were up about 3/16.
The Senate has approved a measure that would limit interest rates on credit cards to 14%, about four or five points below current levels, and House members are expected to introduce a similar measure today.
Such a move could benefit short-term governments in two ways. It disrupts the market for securities backed by credit cards, since many of those deals might not work at lower rates, which makes plain-vanilla Treasury paper look more attractive to investors, traders said.
They're also wondering whether taking away people's plastic could prove the final blow to already lackluster consumer spending. The American Bankers Association claims the cap would force banks to withdraw "billions of dollars in credit" from high-risk card holders.
"This could accelerate the recession into a depression," a government note trader said.
David Blitzer, chief economist at Standard & Poor's Corp., said talk of a depression seemed overblown, but he called the credit card legislation "bad economics and bad policy."
For some banks, "going from 18% to 14% will make it in their interest to get out of the business," Mr. Blitzer said.
Consumers were already in a bad mood, according to the University of Michigan, which informed its subscribers Friday morning that sentiment had deteriorated further in early November. The preliminary November survey showed a drop to 70.7 from 78.3, with expectations dropping to 62.9 from 70.5 and present conditions down to 82.8 from 90.4.
By late Friday, consumers were probably even glummer, especially if they owned any stocks, since equities prices plunged during the afternoon.
The Dow Jones Industrial Average closed 120.31 points lower, at 2,945.89, with biotechnology stocks reportedly leading the sell-off. That was the largest one-day decline since August 1990.
Traders said most of the short end's gains were on the credit card story and confidence report, but the decline in stock prices gave it a final boost.
Compared to the Treasury market activity during the 1987 stock market cash, Friday's trading was "pretty orderly," a government securities salesman said. "The market's so fully priced to 4 3/4% funds that it's really hard for us to go chugging through these levels."
The long end traded heavily Friday morning, got a boost from some technical moves as futures closed, then made it almost back to Thursday night's close on the stock market's drop.
Traders and analysts said recent economic releases confirmed the economy is in sad shape, which should support long-term Treasury prices.
Additional evidence of economic weakness came Friday when the government reported that October industrial output was flat and last
Treasury Market Yields
Friday Week Month
3-Month Bill 4.67 4.74 5.15
6-Month Bill 4.76 4.86 5.24
1-Year Bill 4.83 4.93 5.36
2-Year Note 5.48 5.60 5.89
3-Year Note 5.85 5.95 6.14
4-Year Note 5.93 6.04 6.31
5-Year Note 6.52 6.65 6.85
7-Year Note 6.93 7.06 7.20
10-Year Note 7.29 7.40 7.49
15-Year Bond 7.63 7.73 7.77
30-Year Bond 7.81 7.91 7.95
Source: Cantor, Fitzgerald/Telerate
month's capacity utilization rate declined by 0.2-point, to 79.6%.
Also on Friday, the Philadelphia Fed said business activity declined in its district in November for the fourth month in a row.
"There's no indicator I can think of that's showing any strenght," said Lawrence Krohn, a senior economist at Lehman Brothers. "It's hard not to be a bond market bull."
But now that the key indicators for October have been released, the bond market is likely to settle into a range for a few weeks, with the November employment report in early December seen as the next market-moving number.
Investors want to see the November jobs report to assess "whether the weakness we've seen is a new trend or a painful temporary development," said Kathleen Stephansen, a senior economist at Donaldson, Lufkin & Jenrette Securities Corp.
The only indicators this week, tomorrow's September merchandise trade and Wednesday's October housing starts, are ho-hummers.
But traders will be listening when Federal Reserve Chairman Alan Greenspan goes before the Senate for his reconfirmation hearings on Tuesday.
The worries about the U.S. economy mean Mr. Greenspan will face some stinging questions. If he gives a replay of his pessimistic comments in Rhode Island last month, the market will benefit.
But Mr. Krohn said recent charges that the Fed was panicking meant, "if [Mr. Greenspan's] really worried, he's going to try not to show it."
The December bond future contract closed 3/16 lower at 100 18\32.
In the cash market, the 30-year 8% bond was 1/16 lower, at 101 31/32-102 3/32, to yield 7.81&.
The 7 1/2% 10-year note rose 9/32, to 101 9/32-101 13/32, to yield 7.29%.
The three-year 6% note was up 3/16, at 100 11/32-100 13/32, to yield 5.85%.
Rates on Treasury bills were lower, with the three-month bill of six basis point at 4.57%, the six-month bill down nine basis points at 4.60%, and the year bill 11 basis points lower at 4.61%.