CHICAGO -- Expectations for good news on inflation gave the Treasury market a solid boost yesterday, and prices ended sharply higher across the yield spectrum.
The 30-year bond closed up more than 3/4 of a point, to yield 6.16%.
Despite a strong November employment report, players pushed the market higher again yesterday, convinced that faster growth in the economy will not necessarily lead to higher inflation. Treasuries benefited yesterday from momentum generated by Friday's impressive rally, traders said.
Many market participants believe that Treasury yields have risen enough and that a further backup in rates was not warranted by the recent string of stronger economic numbers.
"People are realizing that the market may have fallen too much, too fast, and that inflation hasn't posed a threat yet," said Brian Wesbury, chief economist at Griffin Kubik, Stephens & Thompson, Inc. Wesbury said falling oil prices in large part helped calm investors' fears of higher inflation and gave them more confidence to buy Treasuries.
Buying began in overseas trading as investors in Tokyo and London scrambled to purchase U.S. government securities before prices rose further. Foreign investors were encouraged by reports that North American traders established long positions on Treasuries late Friday, believing that the market had located a bottom.
The New York session took its cues from trading activity abroad, and prices moved higher through the session. Traders attributed the buying to retail and speculative accounts.
Players on the buy-side of the market are again going long on long-dated Treasuries, believing that the positive inflation outlook will provide a stable environment for their fixed income investments. Meanwhile, speculative purchases of government-backed paper in the last two sessions have been related to activity in futures trading.
The March bond contract broke above some significant resistance levels yesterday, said Tony Crescenzi, head trader at Miller, Tabak, Hirsch & Co. in New York. Weak technicals dampened interest in the futures market in recent weeks and pushed prices below long-standing support levels.
"A positive development for the market has been the improved technical situation," Crescenzi said. "The indicators are no longer pointing toward lower prices.
With the employment report under its belt, the Treasury market is focusing on this week's round of inflation data, due out Thursday and Friday. Market analysts expect both the producer price and consumer price indexes to come in below 0.2%, an expectation which has allowed investors to shrug off the effects of stronger growth.
Despite the strong November jobs report, the jury is still out on the long-term direction of the U.S. economy and interest rates.
Wesbury said the employment report was an important indicator of the staying power of the recent surge in growth, noting that by all indications, the recovery is here to stay. In November, non-farm payrolls rose by 208,000 and were boosted by the second consecutive increase in manufacturing jobs, after seven months of declines, and an increase in 27,000 construction jobs.
But Samuel D. Kahan, chief economist at Fuji Securities Inc., envisions a different scenario. While agreeing that some strengthening of the economy is occurring, Kahan believes that in order for a sustained recovery to develop, strength must broaden. Although he continues to expect that the economy will advance at a positive growth rate, he has not yet detected sufficient forward momentum to transform the economy's stroll into a sprint.
While market observers remain decidedly mixed about the economy's future growth path, the vast majority are in agreement that the market will continue to attract buyers until inflation becomes a threat.
"The market seems to feel better about strength in the fourth quarter and into next year as long as inflation doesn't act up," Crescenzi said.
In futures, the March bond contract ended up 1 8/32 at 117.15.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday up 3/32 at 100.05-100.06 to yield 4.15%. The 5 1/8% five-year note ended up 9/32 at 100.06-100.08 to yield 5.06%. The 5 3/4% 10-year note was up 15/32 at 100.12-100.16 to yield 5.68%. The 30-year bond was up 26/32 at 101.01-101.05 to yield 6.16%.
The three-month Treasury bill was down two basis points at 3.10%. The six months bill was down two basis points at 3.26%. The year bill was down three basis points at 3.42%.Treasury Market YieldsPrev. Prev. Monday Week Month3-Month Bill 3.14 3.12 3.106-Month Bill 3.33 3.27 3.311-Year Bill 3.53 3.45 3.492-Year Note 4.15 4.15 4.093-Year Note 4.45 4.46 4.365-Year Note 5.06 5.07 5.017-Year Note 5.23 5.28 5.2210-Year Note 5.68 5.73 5.6330-Year Bond 6.16 6.22 6.19 Source: Cantor, Fitzgerald/Telerate