Good news about the budget and a sharp decline in gold prices kept the market well supported yesterday as participants geared up for the employment report.
The 30-year bond closed up 11/32, to yield 6.51%.
Today's employment report will provide participants with their first comprehensive view of economic activity in July and set the market's tone for next week's quarterly refunding.
Most analysts on the Street expect nonfarm payrolls to rise by about 175,000, and the overall unemployment rate to hold steady at 7%.
Treasuries received encouraging news from Washington and the ongoing debate over the deficit reduction package. Sen. Dennis DeConcini, D-Ariz., said he would vote to support the plan, ending several days of speculation about where the package's one-time Democratic opponent would end up. His decision should offset the loss of a former supporter of the package, Sen. David Boren, D-Okla.
The market is working under the assumption that the proposed $496 billion plan will be passed today, and has already factored it into prices.
Downward pressure on gold prices helped nudge the Commodity Research Bureau's index lower, and provided further support for the market. Gold prices were down as much as $25 per ounce and the index closed down 3.76 at 217.71.
While participants generally believe the recent surge in commodities has not threatened long-term inflationary growth, developments in the precious metals market were encouraging to the fixed-income markets.
"The downward erosion of gold prices and reports from Washington have helped the market," said James Rice, head government trader at Aubrey G. Lanston & Co. "It's hard to sell the market when you anticipate passage of this budget package."
The long bond was the star performer as the flattening yield curve continues to direct interest toward long-dated paper. The long end has become more attractive because next week's refunding auction will be the market's last chance to buy bonds in the primary market for six months.
The 10-year note was the only issue that experienced significant selling pressure yesterday. Traders attributed the selling to the Treasury's decision to boost the amount of 10-year notes it will auction as part of its quarterly refunding next week. The market is charged with absorbing $16.5 billion of 10-year notes.
Observers said the bond's strong performance, along with the Federal Reserve's stance on monetary policy and threats of higher short-term rates, makes further flattening of the yield curve likely.
The spread between the yields on the two-year note and 30-year bond has narrowed from 270 basis points at the beginning of July to 240 basis points yesterday.
President Bill Clinton's budget package is a key factor behind the bond's impressive performance this week. Many market participants believe that the budget package will have a contractionary effect on the overall economy, rather than the desired goal of stimulating growth.
Comments yesterday by David Mullins, vice chairman of the Federal Reserve Board, supported that view. Mullins said the economy will stay on a slow-growth path and that the fiscal package will cut off the possibility of a robust expansion.
The market has factored in an increase of between 175,000 and 180,000 nonfarm payroll jobs for today's employment report.
Matthew Alexy, senior market strategist at First Boston Corp., said the jobs report will set the market's tone going into the refunding next week. He said most pre-auction positioning has been postponed until after the report.
"The market wants to see where things stand before it starts setting up for the supply next week," Alexy said. "The report will give us a clear indication of where things are headed."
On the high side of the range of estimates, Michael Moran, chief economist at Daiwa Securities America, expects payrolls to increase by 200,000. Moran and a number of other analysts believe that many summer jobs that emerged in late June were not accounted for in last month's report and will show up in the employment reading for July.
But analysts said that the surface of today's report might overstate growth in the employment sector.
"Even if we get 200,000 new jobs, it won't change the market's view of the economy or employment." Moran said. "If you put the June and July reports together you'll see that growth remains weak."
In economic reports released yesterday, factory orders rose 2.6%, the first increase in three months and the largest since December's 5.6%. Economists said factory orders sagged during the spring because merchants' inventories were running high because of sluggish sales early this year.
Economists said June's gain in orders suggested that the old stock-piles were depleted and merchants were ordering new products to satisfy fresh consumer demand, which government estimates indicate was nearly five times stronger in the second quarter than in the first.
Putting the report into perspective, Steven Ricchiuto, chief economist at Barclays de Zotte Wedd Securities, said the increase in factory orders merely supported the finds of last week's durable goods report. Most of the increase in orders for both reports came from a boost in the aircraft component.
"When you take away the aircraft orders component, neither report shows much upward movement," he said. "While there are signs of upward potential in these numbers, we won't know what area they're concentrated in until next month's reports."
Weekly jobless claims fell 60,000 in the week ended July 31, reversing last week's 44,000 increase. Analysts said that recent claims data have been distorted by floods in the Midwest and shutdowns at General Motors plants.
Late yesterday, the Fed reported its weekly money supply figures. M1 rose $2.1 billion, M2 rose $700 million, and M3 fell $11.2 billion.
In futures, the September contract closed down 3/32 tO 115.11
In the cash markets, the 4 1/8% two-year note was quoted late yesterday up 3/32 at 100.08-100.09 to yield 4.10%; the 5 1/4% five-year note ended up 6/32 at 100.11-100.13 to yield 5.15%; the 6 1/4% 10-year note was up 3/32 at 102.29-102.31 to yield 5.83%; and the 7 1/8% 30-year bond was up 11/32 at 107.27-107.29 to yield 6.51%.
The three-month Treasury bill was down three basis points at 3.10%; the six-month bill was down three basis points at 3.27%; and the year bill was down three basis point at 3.51%.