Arkansas Gov. Bill Clinton's victory in Tuesday's presidential election removed one source of the uncertainty that has clouded the Treasury market in recent weeks, but traders switched immediately to worrying about tomorrow's employment report and next week's refunding auctions.
Late yesterday, the 30-year bond was 1/8 point lower to yield 7.67%, and note prices were unchanged to slightly higher.
Treasury prices enjoyed a brief rally in overseas trading, with the long bond up as much as 3/4 point from Tuesday's close, as the election results elicited a sigh of relief and a wave of short covering in the Treasury market.
But those gains began eroding once New York traders came in to work.
"The market is finally getting past the election and now we're watching it prepare itself for the refunding next week and the employment statistics," said Brian Fabbri, chief economist at Midland Montagu. "I think traders are setting up a few more shorts in case that number proves better than expected.
The selling seemed to be concentrated at the long end, and the long end's weakness eventually pulled the rest of the market down with it, traders said.
Most of the $37 billion of securities to be sold at the refunding are long-term, and apprehension about that supply may be pushing long-term prices lower, a note trader said.
"Plus I think, the long end is probably a little nervous about Clinton, and what might happen, to taxes and inflation" once he takes office, he added.
A bond trader agreed Clinton's victory was causing some uneasiness at the long end. "You had a ~sell the rumor, buy the news' type of reaction [ovenight], but the fundamentals of a Clinton presidency over time are still negative in terms of the ramifications for the bond market."
Clinton tried to calm traders' worries yesterday when he told reporters he was seeking to "strengthen American markets, not weaken them." But Fabbri questioned whether that sentiment jibed with the President-elect's economic, plans.
"His campaign was directed at telling everyone he was going to improve the economy through a more aggressive use of fiscal policy." Fabbri said. "We are now being told also that he wants to maintain some kind of good spiritual link with the financial markets by telling them he's disciplined in his approach."
"I think that's important to say. I just find the two could be contradictory," he continued. "If you intend to stimulate the economy through fiscal policy, you virtually have to enlarge the deficit, and the financial markets get upset when you do it."
Traders said they would be watching Clinton's cabinet choices and listening to anything he has to say about his economic plans to get a better sense of what his election means for the bond market.
Some traders say Clinton's election could cause the market to react abnormally to tomorrow's October jobs data.
Usually the bond market would respond well to weak employment data, but some traders argue that long-term Treasury securities would sell off on a very weak jobs report because the market would interpret such a number as an additional argument for fiscal stimulus.
In any case, the jobs report is seen as the key factor determining the market's mood as it goes into next week's refunding auctions.
The bond trader said this employment report is particularly important because the recent economic data have split the market into two camps. Some participants cite the improvement in jobless claims and car sales, among other data, as signs the economy is beginning to turn upward, while others are convinced that growth remains lackluster.
"The employment report could tip the scales, unless it's another one of these mediocre numbers," the trader said.
Economists surveyed by The Bond Buyer on average expect a 20,000 increase in October nonfarm payrolls. That would be an improvement over the 57,000 decrease posted in September and the 128,000 jobs lost in August.
Analysts say payrolls would have improved more last month if it were not for jobs lost because of the end of the federally funded summer jobs program for teenagers, which may have subtracted as many as 45,000 workers from the payrolls, and an early retirement program at the Postal Service that will subtract about 30,000 workers.
Economists on average predicted a 56,000 gain in payrolls if the effects of the summer jobs program were excluded.
The bond market got some stronger-than-expected economic news yesterday, but the numbers had little impact on prices.
The indicators "were surprisingly strong, but I don't think they mattered because you're not building a trend yet," a bond salesman said. "One number comes out weak, the next comes out strong.
The Commerce Department reported a 1.1% rise in September factory orders when the market was expecting only a 0.1% increase.
Part of the strength came from an upward revision of the September durable goods number reported last week, which now shows a 0.1% decrease instead of the 0.4% decline originally reported.
Analysts said another big contributor to the September increase was a 2.3% bounce in orders for nondurable goods, but they said the jump was just a reversal of the 4% decline posted in August.
Meanwhile, the September report showed unfilled orders fell for the 13th month in a row and reached the lowest level since December 1988.
Later in the day, auto manufacturers reported decent vehicle sales during late October. Car sales rose to a 6.6 million annual rate from the 6.4 million pace in mid-October, and truck sales were also strong.
Also yesterday, the Federal Reserve released its so-called beige book, which compiles economic reports from regional Fed banks around the nation.
The Fed said the economy was growing at a "slow and uneven pace," and noted the manufacturing sector was losing momentum. Traders said there was nothing new in the report.
The December bond futures contract closed 3/8 lower at 102 10/32.
In the cash market, the 7 1/4% 30-year bond was 6/32 lower, at 94 29/32-95 1/32, to yield 7.67%.
The 6 3/8% 10-year note was unchanged, at 96 13/32-96 17/32, and yielded 6.86%.
The three-year 4 5/8% note was up 3/32, at 99 10/32-99 12/32, to yield 4.86%.
In when-issued trading, the three-year note to be sold Monday was bid at 5.04%, the 6 3/8% 9 3/4-year note to be auctioned Tuesday was bid at 6.90%, and the 30-year bond to be sold next Thursday was yielding 7.66%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.01%, the six-month bill off two basis points at 3.22%, and the year bill two basis points lower at 3.39%.
Treasury Market Yields
Wednesday Week Month
3-Month Bill 3.05 2.98 2.85
6-Month Bill 3.29 3.25 2.98
1-Year Bill 3.50 3.43 3.11
2-Year Note 4.41 4.30 3.85
3-Year Note 4.86 4.75 4.32
5-Year Note 5.93 5.76 5.39
7-Year Note 6.43 6.29 5.99
10-Year Note 6.86 6.72 6.43
30-Year Bond 7.67 7.60 7.48
Source: Cantor, Fitzgerald/Telerate