A decline in commodity prices and anticipation of good inflation numbers next week helped the Treasury market end with modest gains yesterday.
Late in the afternoon, the 30-year bond was up 1/4 point to yield 6.65%. the lowest closing yield since the government began selling 30-year bonds in 1977. The number bests the 6.66% closing level posted several times over the last two weeks.
The market managed to end higher even though its initial move was to sell off yesterday morning in response to an unexpected decline in new jobless claims.
Treasury prices began to retrace those losses later in the morning and continued to improve over the course of the afternoon.
"We ran back up into positive territory mostly on the fact that the [Commodity Research Bureau index] and oil were lower," said Bob Bannon, senior bond strategist at I.D.E.A., an on-line advisory service.
The CRB index closed 1.25 points lower at 215.98, and the August West Texas oil future contract fell 23 cents to end at $ 17.79 a barrel. The declines were a relief to the bond market, which resumed worrying about inflation as commodity prices spiked in recent trading sessions.
A Treasury note trader said the market's expectations of favorable indicators next week also played a role in yesterday's bounce in bond prices.
"The inflation numbers are supposed to be good and there's anticipation of [municipal] defeasance deals," he said. "With the news good and buying going on, the market trades well."
June producer prices will be reported Tuesday, and the June consumer price index is due out Wednesday.
The market's break through a resistance level on the bond futures contract encouraged some technical buying yesterday afternoon, traders said.
Prices inched a little higher in late trading after the Federal Reserve Bank of New York reported a big decline in M2, the most closely watched of the money supply numbers.
According to the New York Fed, the nation's M2 money supply fell $ 11.1 billion to $ 3.5 trillion in the week ended June 28. That was a bigger decline than economists had expected. During the same period, M1 rose $ 1.3 billion to $ 1.1 trillion and M3 dropped $ 13.2 billion to $ 4.2 trillion.
Traders said the price moves occurred in very thin trading. Alan Levenson, a money market economist at UBS Securities, described the market as somnolent," and said he thought it would remain quiet until next week's indicators arrive.
"We'll have news to trade off of next week," Levenson said. "I think what people are waiting for is more information about the economy and inflation."
Levenson said next week's economic news -- like June retail sales and May business inventories -- may be more revealing than the price reports, which are expected to be heavily influenced by a drop in tobacco prices. He is forecasting a 0.5% decline in the core rate of producer prices, excluding food and energy costs, but said the core rate would rise 0.2% if tobacco prices were also excluded.
Yesterday morning, the Labor Department said new claims for unemployment insurance fell 12,000, to 327,000, in the week ended July 3. The consensus forecast called for an increase of 1,000 claims.
Steven Wood, director of financial markets research at the Bank of America, called the decrease in claims encouraging," but said he would like to see more than one week's numbers before concluding the labor market was improving.
The decline put the latest week's claims and the four-week moving average of new filings at the lower end of the range they have inhabited for the last six months, Wood said. But he noted that "we were down at these levels before back in February and in December, and haven't been able to move substantially lower. "
Wood said investors were "noncommittal" on the bond market right now. That attitude, combined with the near-record price levels, means the market is more vulnerable to a correction than to further price gains, he said.
The September bond futures contract closed 3/8 higher at 114 3/32.
In the cash market, the 7 1/8% 30-year bond was 9/32 higher, at 106-106 2/32, to yield 6.65%.
The 6 1/4% 10-year note rose 6/32, to 103 19/32-103 21/32, to yield 5.74%.
The three-year 4 1/4% note was up 1/8, at 99 29/32-99 31/32, to yield 4.26%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.02%, the six-month bill off two basis points at 3.10%, and the year bill four basis points lower at 3.26%.
In other news, the New York Fed reported the federal funds rate averaged 3.10% for the week ended Wednesday, down from 3.13% the previous week.