Hopes for Another Easing Flourish On News of Greenspan-Bush Talks

Treasury prices advanced again Friday after a meeting between President Bush and Federal Reserve Chairman Alan Greenspan created another flurry of speculation about a Fed easing.

Late in the day, the 30-year bond was up more than 5/8 point to yield 7.81%.

Prices took off early in the New York session as traders responded enthusiastically to the news that Mr. Greenspan had been summoned to the White House to meet with President Bush and his economic advisers.

Traders assumed the administration officials wanted to put pressure on Mr. Greenspan to ease monetary policy.

Another factor was the news that President Bush would address the nation Friday night to report a change in defense strategy.

Analysts said that if the President announces defense cuts, it would represent only a small positive for the market, since the savings would not occur overnight.

But some traders speculated Mr. Bush might have tried in the meeting to trade lower defense spending for another cut in interest rates.

The hopes for another easing pushed the December bond futures contract and the eurodollar contract to new highs.

"You're seeing the dollar get hit a little and bonds and euros rallying," said Karen Gibbs, a senior futures analyst at Dean Witter Reynolds Inc.

Cash traders said retail investors were good buyers and showed the most interest in short-term and intermediate notes.

But the long end managed to hold its own, a feat that a government bond trader attributed to some short covering.

Technical traders shorted long-term paper on Thursday, discouraged by the bond futures contract's failure to break through a resistance level, and when the contract rallied on Friday, they were forced to cover their short positions, the trader said.

When the White House meeting ended, White House spokesman Marlin Fitzwater said Mr. Greenspan agreed the economic recovery is continuing.

Mr. Fitzwater also said Mr. Bush had not asked Greenspan to lower rates.

At this point, many traders expect the Fed will ease after the September employment statistics are released this Friday, but the forecasts for Friday's number are not quite as friendly as the market's bullish mood would suggest.

A preliminary survey found predictions ranging from a 15,000 decline to an 85,000 increase in September payrolls, with the consensus calling for a 30,000 gain.

Peter Greenbaum, an economist at Smith Barney, Harris Upham & Co., is expecting payrolls to rise by 20,000, and said he would not expect the Fed to cut rates in response to such a report.

"Barring a real disaster with Friday's report, we think it is too soon for the Fed to react and ease again," Mr. Greenbaum said. "We'd like to think they'd wait a little longer and get a look at more money data as well."

And Mr. Seto pointed out that last Thursday's money supply numbers looked a little healthier, which may have eased Fed worries on that score.

Last week's gains put M2 near the bottom of the Fed's target range, although it is still $60 billion below the mid-point of the range, he said.

There are plenty of other indicators to be released between now and Friday, and Ian Amstad, an economist with Chase Securities in London, said some of them might contain good news for bonds.

Mr. Amstad is expecting a small decline in tomorrow's September purchasing managers' index, in line with the decline seen in the Philadelphia Fed's report released earlier this month. That "would add fuel to the argument that the recovery on the manufacturing side is going to run out of steam," he said.

He also expects tomorrow's August leading indicators to come in flat, which may cause a stir after six months of increases.

On Friday, the August income and spending numbers had little impact on the bond market.

August personal income rose 0.4%, which was a little softer than expected. August spending rose only 0.1%, in line with expectations, but July spending was revised up to a 0.7% gain from the 0.4% increase reported last month.

Overall, "the signs are not very positive for consumers," Mr. Seto said. "Income growth was slightly softer than anticipated."

The spending gains in July and August suggest third-quarter output could jump 3% or more, but if income remains soft, the economy may falter again in the fourth and first quarters, Mr. Seto said.

The December bond futures contract closed 11/16 higher, at 99 28/32.

In the cash market, the 30-year 8 1/8% bond was 11/16 higher, at 103 12/32-103 16/32, to yield 7.81%.

The 7 7/8% 10-year note rose 13/32, to 102 19/32-102 23/32, to yield 7.47%.

The three-year 6 7/8% note was up 3/32, at 101 18/32-101 20/32, to yield 6.24%.

Both new notes had improved significantly from the levels at which they were auctioned. In when-issued trading, the 6 1/8% two-year note was up 1/16 at 100 6/32-100 7/32 to yield 6%, down from the 6.14% average at last Tuesday's sale, and the 7% five-year note was up 1/4 at 100 5/32-100 7/32 to yield 6.94%, down from the 7.05% auction average.

Rates on Treasury bills were mixed, with the three-month bill steady at 5.14%, the six-month bill three basis points lower at 5.14%, and the year bill off three basis points at 5.14%.

Phillips Nominated to Fed

President Bush nominated Susan Phillips, who headed the Commodity Futures Trading Commission from 1983 to 1987, to the Fed on Friday.

Ms. Phillips would succeed Martha Seger and serve the remainder of Ms. Seger's 14-year term, which ends in 1998.

Ms. Seger left the board in March, and it has been rumored ever since that Ms. Phillips would be named as her replacement.

Since leaving the CFTC, Ms. Phillips has been a professor of finance at the University of Iowa's College of Business Administration in Iowa City, Iowa.

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 5.27 5.32 5.44

6-Month Bill 5.34 5.45 5.52

1-Year Bill 5.41 5.52 5.65

2-Year Note 6.00 6.14 6.34

3-Year Note 6.24 6.39 6.64

4-Year Note 6.49 6.59 6.79

5-Year Note 6.94 7.06 7.31

7-Year Note 7.28 7.36 7.64

10-Year Note 7.47 7.56 7.80

20-Year Bond 7.70 7.82 7.99

30-Year Bond 7.81 7.88 8.05

Source: Cantor, Fitzgerald/Telerate

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