The first round of the November inflation series nourished the Treasury market's appetite for proof that there are few price pressures in the economy.
Prices ended narrowlyd mixed yesterday, with the 30-year bond ending up 5/32 point, to yield 6.15%.
Long-dated Treasuries were yesterday's star performers as players grew more confident that inflation remains under wraps. Meanwhile, the short end came under some downward pressure as some market participants speculated that short-term rates are poised to move higher.
Treasuries got off to a rocky start as the Labor Department reported that producer prices were unchanged in November, with an increase of 0.4% excluding food and energy.
Treasury prices traded lower initially following the release, which differed from economists' forecasts for increases of 0.2%. But the market rebounded as players realized that much of the increase in core inflation reflected a bounce-back in auto prices.
The larger than expected increase in core inflation was viewed as little more than nois by the market. Last month's inflation series was pulled lower by declining car prices, market observers said, noting that the November figures were skewed higher by the volatile component.
"Net-net, the inflation picture looks good and the market is in good shape," said Matthew Alexy, senior financial market strategist at CS First Boston Corp.
Participants are nowd looking forward to today's consumer price index, which most economists polled by The Bond Buyer expect to increase by 0.2% for both the overall figure and the core.
The improved technical state of the market also lent support to the cash market yesterday futures traders said. Treasuries pressed higher through the morning as players in cash reacted favorably to increases in futures prices, brought on by the March bond contract's ability to bounce backc from the 115.22 area and its test of the 116.10 level.
But as market fundamentals and technicals shape up, investors are still grappling with the prospect of higher interest rates. Recent comments by Federal Reserve officials and the Publicd Securities Association about the risk of higher inflation and rates have put the Treasury market on the defensive and kept large buyers at bay.
Adding more fuel to the fire, Fed Governor Susan Phillips said yesterday that inflation remains under control but price pressures may start building next year as the U.S. economy gathers strength. However, accelerating growth in the fourth quarter may start to squeeze capacity, pressuring prices, she said in an interview with Reuters.
Market observers generally expect the Federal Reserve to raise rates sometime next year to prevent a resurgence of inflation now that the economy is on a steady growth path.
Phillips' comments, coupled with ones made Monday by Fed Vice Chairman David Mullins, appeared to confirm that view but failed to indicate whether a Fed tightening might come sooner.
The short end of the Treasury market traded slightly lower on the comments, which were at odds with those made by other central bank officials in recent sessions. Both Fed Governor Edward Kelly and Atlanta Fed President Robert Forrestal stated recently that they do not believe the central bank should strike preemptively against inflation.
"U.S. monetary policy makers are at odds with one another, and the market isn't going to react one way or the other until they are iin consensus," one head trader said.
Jim Winder, director of financial markets research at Merrill Lynch Government Securities Inc., believes the market will remain confined to recent levels until the end of the year. While Winder predicts Treasuries will experience "pockets of illiquidity," he does not expect the market to break out of well-defined ranges.
"The only thing that will allow the market to move out of the current range is some indication that the Fed will move or some sign that the slowing in the first quarter that the market expects wond't happen," he said.
On the economic data front, the Labor Department reported that initial weekly jobless claims rose 13,000 to 335,000 in the week ended Dec. 4, a rebound from last week's decrease of 17,000 claims.
Late yesterday, the Fed reported its weekly money supply figures. In the week ended Nov. 29, M1 rose $2.9 billion, while M2 and M3 both fell $400 million.
In futures,d the March bond contract ended up 7/32 to 117.18.
In the cash markets, the 4 1/4% two-year note was quoted late yesterday down 2/32 at 100.04-100.05 to yield 4.16%. The 5 1/8% five-year note ended unchanged at 100.06-100.08 to yield 5.06%. The 5 3/4% 10-year note was up 3/32 at 100.19-100.23 to yield 5.65%. And the 6 1/4% 30-year bond was up 5/32 at 101.07-101.11 to yield 6.15%.
The three-month Treasury bill was down one basis points at 3.07%, the six-month bill was up one basis point at 3.25%, and the year bill was up two basis points at 3.44%.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.11 3.12 3.126-Month Bill 3.32 3.26 3.271-Year Bill 3.55 3.46 3.402-Year Note 4.16 4.20 4.143-Year Note 4.46 4.52 4.515-Year Note 5.06 5.14 5.067-Year Note 5.20 5.33 5.2710-Year Note 5.63 5.79 5.6830-Year Bond 6.15 6.27 6.20 Source: Cantor, Fitzgerald/Telerate