Investors decided Friday they overreacted to bad inflation news earlier in the week, and, buoyed by favorable housing numbers, regained a big chunk of lost ground.
The 30-year bond finished the day up 29/32, to yield 7.95%. The bond closed the day Thursday above 8% for the first time in five weeks, after a 1 5/8 point sell-off on news that the consumer price index had jumped 0.4% in September, instead of the 0.2% the market expected.
But by the London session Friday the market had decided it went too far, that despite less than ideal progress on inflation, fundamental economic indicators still point to continued weakness and the need for another credit ease by the Federal Reserve.
Such an ease is unlikely in the next two weeks, however, with most market participants now expecting the move will have to wait until at least the release of employment figures on Nov. 1.
Treasury Market Yields
Friday Week Month
3-Month Bill 5.15 5.08 5.32
6-Month Bill 5.24 5.20 5.45
1-Year Bill 5.36 5.28 5.52
2-Year Note 5.89 5.88 6.14
3-Year Note 6.14 6.14 6.39
4-Year Note 6.31 6.31 6.59
5-Year Note 6.85 6.81 7.06
7-Year Note 7.20 7.16 7.36
10-Year Note 7.49 7.45 7.56
15-Year Bond 7.77 7.73 7.82
30-Year Bond 7.95 7.88 7.88
source: Cantor, Fitzgerald/Telerate
"The tendency for the market has been to do things when you least expect it and then correct," said Jan Hurley, a senior market analyst at Chase Securities. "Thursday's trashing of the market looked like we wanted to get above 8%, but we went right through that level" on Friday.
Ms. Hurley said despite the bad inflation news, most other market indicators argue that the economy will need a push soon.
Housing starts for September, for example, showed continued weakness, as did the Philadelphia Fed survey of business conditions.
Housing starts fell 2.2% last month, to 1.03 million units from August's 1.06 million, according to the Commerce Department. And the Philadelphia Fed's survey showed a continuing trend of slower growth in regional manufacturing.
Both of those reports lent support to Friday's rally. In addition, preliminary results of a University of Michigan survey indicated consumer confidence fell sharply in the first half of October.
Kathleen Stephansen, a money market economist with Donaldson, Lufkin & Jenrette Securities, said the indicators show the economy is "still doing okay, but every month it's doing a little less okay than the preceding month."
This week's auctions of two-year notes on Wednesday and five-year notes on Thursday could work against any attempts to build on Friday's gains, Ms. Stephansen said.
Ms. Hurley agreed. market activity this week will be "supply-driven more than fundamentals-driven," she predicted. The relationship between two-year notes and the long bond seems relatively fixed, she added, so if twos back up going into the auction the 30-year bond is likely to follow suit.
In when-issued trading Friday, the two-year note was bid at 5.92% and the five-year note stood at 6.85%.
The other important factor for the market between now and the employment report will be durable goods for September, released on Thursday. But most market sources say the number is unlikely to be dramatic enough to change the perception that an ease will wait until next month.
The December bond futures contract closed 1/2 point higher Friday, at 99 5/32.
In the cash market, the 30-year 8 1/8% bond was 29/32 higher, at 101 27/32-101 31/32, to yield 7.95%.
The 7 7/8% 10-year note rose 7/16, to 102 14/32-102 18/32, to yield 7.49%.
The three-year 6 7/8% note was up 7/32, at 101 25-32-101 27/32, to yield 6.14%.
Rates on Treasury bills were lower, with the three-month bill down four basis points at 5.03%, the six-month bill down seven basis points at 5.05%, and the year bill three basis points lower at 5.09%.