Treasury prices moved higher yesterday afternoon, thanks to the Federal Reserve's sizeable purchase of notes and bonds and a report that department store sales weakened during August.
The market's gains occurred as the dollar was making new lows against the German mark and traders said the link between the bond and the dollar seems to have broken down completely for the time being.
By late afternoon, the 30-year bond was up 1/2 point and yielded 7.37%, and note prices were 1/8 to 3/8 point higher.
Treasury prices showed barely any change yesterday morning even though all three economic indicators - the August National Purchasing Managers' Index and the July construction spending and leading indicators reports - Contained signs of weakness.
The market began to rally early in the afternoon when the Federal Reserve said it was buying coupons for its own account. Analysts said the purchase was made to add reserves to the monetary system and did not indicate any change in monetary policy. Still, the move was good news for dealers, who estimated the Fed took $2 billion to $4 billion of notes and bonds out of the market.
"They were aggressive in the three-year and four-year area and also bought off-the-run long bonds," a coupon trader said. But a bond trader said the Fed was more interested in long-term paper than short-term notes.
As the close of futures approached, the bond market received an additional boost from reports that the Johnson Redbook weekly survey of department store sales showed August sales declined 0.7% from July levels.
The rally pushed the December bond futures contract through a key resistance level at 1043/32, inspiring more buying by participants who follow technical patterns.
A futures trader said some of the buying was short-covering. "A lot of people had sold off on the weaker dollar," he said, and then got caught short when the market rallied.
Traders said the market had been inclined to do better. All the numbers Monday and yesterday depicted an economy that is going nowhere, and participants are optimistic about Friday's August employment report. The coupon trader said the consensus forecast was for an increas of 150,000 to 175,000 in August payrolls, with 75,000 of that coming from the summer jobs program for teenagers. "That's a net gain of 75,000, Which is nothing," he said.
The trader added that many participants liquidated their positions a week-and-a-half ago when the bond market sold off on the dollar's weakness. Now they have decided they overreacted to the dollar's move and want to get back in, he said. ,
Steven Wood, director of financial markets research at Bank of America, said investors and traders were starting to discount their initial concerns about the weak dollar that it would cause inflation and scare foreign investors away from the Treasury market.
"People are realizing the inflation prospects are quite minimal, and foreign investors haven't been major participants in our market for a couple of years anyway," he said.
Late yesterday, the dollar was quoted at 1.3900 marks, down from 1.4027 late Monday, and at 122.70 yen, down from 123.
Scott Winningham, chief market analyst at Stone & McCarthy Research Associates in Princeton, N.J., said the bond futures contract's break through resistance yesterday suggests further gains are in store for Treasury securities.
The next key resistance levels are at 105 24/32 and 106 on the December contract, with 106 representing this year's highs.
"My guess is we wouldn't break resistance before the employment report, but we might approach that level and by Friday be set for a test of the highs," he said.
Analysts said yesterday morning's three indicators provided little new information about the economy, but continued to show that growth is anemic.
The National Association of Purchasing Management's August survey came in at 53.8%, a slight decline from the 54.2% reading in July, just as economists predicted.
According to the association, any gain above 50% shows the manufacturing sector is growing, and August marked the seventh month in a row in which the survey had topped 50%.
"It's another one of these more-of-the-same reports." said Robert Dederick, chief economist at the Northern Trust Co. "The manufacturing sector continues to push forward, but at a still sluggish pace."
The report showed that new orders and production continued to grow, and suppliers' deliveries slowed for the third month in a row, which suggests demand is increasing.
A tiny bit of improvement was seen in the report's employment component. According to the purchasing managers' survey, employment rose to 47.2% in August from 45.8% in July, indicating employment fell but at a slower rate than in July.
The July construction spending report showed a 0.6% fall, which was weaker than expected, but the June decline was revised to 0.4% from the 1.5% decrease reported last month.
And the July index of leading indicators rose 0.1%, in line with market expectations, while the June change was revised to a 0.3% decrease from the 0.2% decline reported last month.
Bill traders said bill prices improved slightly when the Treasury announced it will sell only $22 billion of three- and six-month bills next Tuesday, down from the $23.2 billion it has been selling.
The December bond futures contract closed 19/32 higher at 104 18/32 and the September contract was up 19/32 at 105 24/32.
In the cash market, the 7 1/4% 30-year bond was 13/32 higher, at 98 13/32 - 98 17/32, to yield 7.37%.
The 6 3/8% 10-year note rose 13/32, to 98 20/32 - 98 24/32, to yield 6.54%.
The three-year 4 5/8% note was up 5/32, at 100 2/32 - 100 4/32, to yield 4.57%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 3.16%, the six-month bill down three basis points at 3.23%, and the year bill two basis point lower at 3.31%.
Treasury Market Yields
Tuesday Week Month
3-Month Bill 3.20 3.23 3.23
6-Month Bill 3.30 3.35 3.35
1-Month Bill 3.42 3.54 3.53
2-Month Bill 4.10 4.28 4.28
3-Month Bill 4.57 4.84 4.74
5-Month Bill 5.50 5.73 5.68
7-Month Bill 6.05 6.26 6.16
10-Month Bill 6.54 6.72 6.62
30-Month Bill 7.37 7.47 7.42
Source: Cantor, Fitzgerald/Telerate