Treasury prices closed with modest gains yesterday as the Federal Reserve's sizable purchase of notes and bonds buoyed the market for the second day in a row.
During the afternoon, prices gave back some of their previous gains on a wire service report that Fed officials said the weak dollar did not preclude another cut in interest rates.
Late in the afternoon, the 30-year bond was up 1/8 point and yielded 7.36%, and note prices were up as much as 1/4 point.
On Tuesday afternoon, prices rose after the Fed announced it was buying notes and bonds.
The Fed's purchase, known as a "coupon pass" in the market, was done to add reserves to the monetary system and did not signal any change in monetary policy.
But the removal of an estimated $3 billion to $4 billion of securities had a positive impact on prices.
The Fed's purchases were arranged to settle today, and yesterday morning dealers were still in the market getting securities for the Fed, said Stephen Gallagher, an economist at Kidder, Peabody & Co.
"The trend was to gather up the securities to sell them to the Fed," Mr. Gallagher said. "That gave the market upward movement in the morning."
Some traders reported seeing good retail interest yesterday morning as well, especially in the intermediate sector.
Traders said the economic fundamentals still favor lower interest rates, with a stream of indicators that show sluggish growth keeping hopes of another Fed easing alive.
In the middle of the afternoon, though, the possibility of another Fed easing became a liability for the Treasury market.
Bond prices followed the dollar lower after Market News Service ran a story that said the Fed was more worried about the economy than the dollar and might ease again if the statistics show enough weakness. The story cited two unnamed Fed officials it described as "well-placed."
"The market was firm most of the day, but it gave up the ghost when the dollar started getting hit" on the Market News story, a bond trader said.
In recent days, Treasury prices had stopped responding to the dollar's slide. But Mr. Gallagher said even though the Treasury market had accustomed itself to the notion of an "orderly decline" in the dollar, "that's very different from believing the Fed is going to abandon the dollar and having them make statements that they will go ahead and ease despite the dollar."
Yesterday morning's report of a 1.1% drop in July factory orders provided more evidence of economic weakness, but the market paid little attention because the number was regarded as old news.
That decline was not as much as the 1.7% decrease economists predicted because the big drop in durables reported last week was offset by a rise in orders for nondurable goods.
"The nondurables was actually quite encouraging, showing another gain of 0.9% after rising 2.1% in June," said Lynn Reaser, chief economist at First Interstate Bancorp. in Los Angeles. "Shipments also showed a little increase, which at least points to an economy that is growing, albeit slowly."
But Ms. Reaser said July's 1.3% decline in unfilled orders was troubling. It was the 11th month in a row that unfilled factory orders have fallen, and the decline brought unfilled orders to $484.29 billion, the lowest level since February 1989.
Today's activity is expected to be quiet as traders wait for tomorrow's August employment report. But there are a couple of indicators that might inspire some price action: weekly jobless claims and late-August car sales.
Economists expect car sales to improve to 6.3 million from 6.2 million in mid-August and 5.7 million during early August.
The consensus forecast calls for an 8,000 increase in initial claims, to 390,000, for the week ended Aug. 22.
Analysts said the market is also beginning to pay attention to the number of people who were eligible to file an initial claim for state benefits, but instead chose to file for emergency unemployment benefits. That option has only been available to newly unemployed people since the beginning of August.
The December bond futures contract closed 5/32 higher at 104 23/32, after trading as high as 105.
In the cash market, the 71/4% 30-year bond was 5/32 higher, at 98 15/32-98 19/32, to yield 7.36%.
The 6 3/8% 10-year note rose 1/4, to 98 27/32-98 31/32, to yield 6.51%.
The three-year 4 5/8% note was up 3/32, at 100 4/32-100 6/32, to yield 4.55%.
Rates on the three most recently issued Treasury bills were all one basis point lower, with the three-month bill at 3.15%, the six-month bill at 3.22%, and the year bill at 3.30%.