Propelled by statistics that support the economy's slow-growth, low-inflation scenario, the Treasury long bond closed at an all-time low yield yesterday.
The 30-year bond ended up 28/32 to yield 5.85%, the lowest yield in 25 years.
The market teed off favorable news on inflation and an increase in the number of Americans applying for unemployment benefits.
Short covering on the economic reports followed by strong retail buying, drove prices higher, dealers said. Long-end issues outperformed the rest of the Treasury market, as the employment numbers prompted retail investors to move out on the yield curve.
Renewed confidence that inflation will remain low and the employment sector will stay sluggish has shored up investors' desire this week to own Treasuries, particularly at the long end.
Issues at the short end underperformed other sectors of the curve because participants said they believe that recent economic statistics have given the Federal Reserve room to leave interest rates at current levels.
"The long end firmed very nicely by the perception that inflation is not a threat, while the short end is literally being held in check by the level of the federal funds rate," said Joseph Liro, chief economist at S.G. Warburg & Co.
Steady Fed policy has locked the funds rate around 3% and lessened the potential for capital gain at the short end of the curve, Liro said.
The producer price index for September rose 0.2%. While the increase was in line with expectations, the market was encouraged by a flat reading on core PPI, which excludes food and energy. Players also liked the fact that a number of the report's components were well-behaved, including prices of women's apparel, tobacco, and automobiles.
Joseph Carson, chief economist at Dean Witter Reynolds, said the numbers show that inflation remains "relatively tame" and that the PPI figures were consistent with his forecast for a 3% rate of inflation for the year.
Initial state unemployment insurance claims increased 8,000 to a seasonally adjusted 329,000 in the week ended Oct. 9, the Labor Department reported. This is the highest level for claims in two weeks and pushed the four-week moving average up to 329,750, the highest level in seven weeks.
Market observers said the report lends further support to the view that the employment sector, while showing some signs of stabilizing, continues to have problems.
Total retail sales in September, also released yesterday morning, inched up a scant 0.1% to $174.4 billion as auto sales dropped 1.8%, the Commerce Department reported. The overall increase followed a revised 0.5% gain in August retail sales, up from the 0.2% rise reported last month.
In a prepared statement, Commerce Secretary Ronald Brown said he was encouraged by recent economic reports that show increases of 0.1% for retail sales and 0.2% for producer prices for September. "Today's announcement of a 0.1% increase in September retail sales is continuing evidence that economic growth is being sustained and is poised to increase further by the end of the year," Brown said in the release.
The modest increase in the producer price index demonstrates that the recovery is being accompanied by stable prices, he said.
"These and other recent data on housing starts and investment expenditures and plans suggest that economic activity is accelerating and is likely to continue to do so," Brown said.
Market analysts generally interpreted the retail sales report as evidence that consumer spending is improving gradually.
Stan Shipley, senior economist at Lehman Government Securities, said that with the housing, home furnishings, and department store sales components of the report posting solid pins in September, it appears consumer spending is perking up.
Today's consumer price index will either confirm or damage the notion that there are few upward price pressures in the economy. Dealers said retail demand for treasuries has increased sharply in recent sessions, but that accounts on the buy-side of the market continue to sit on the sidelines to see what the CPI report shows about inflation.
Given the bullish tone of the market, participants do not want to go into the CPI release with a short position, dealers said.
Money market economists polled by The Bond Buyer expect an increase of between 0.2% and 0.3% for the CPI. Such a reading would support the basic message of limited price pressures in the economy, which is likely to keep the market on a bullish track, they said.
The Treasury 52-week bill auction drew solid demand at an average and a high of 3.25%, and the bid-to-cover ratio was strong at 3.79.
In futures, the September contract ended up 27/32 to 121.07.
In the cash markets, the 31/8% two-year note was quoted late yesterday up 1/32 at 100.04-100.05 to yield 3.79%, the 43/4% five-year note ended up 7/32 at 100.20-100.22 to yield 4.59%, the 5 3/4% 10-year note was up 14/32 at 103.31-104.03 to yield 5.21%, and the 61/4% 30-year bond was up 28/32 at 105.15-105.19 to yield 5.85%.
The three-month Treasury bill was down two basis points at 3.01%, the six-month bill was down one basis point at 3.10%, and the year bill was down two basis points at 3.20%.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.01 2.98 3.006-Month Bill 3.10 3.08 3.151-Year Bill 3.20 3.21 3.352-Year Note 3.79 3.80 3.853-Year Note 4.03 4.09 4.145-Year Note 4.59 4.68 4.737-Year Note 4.76 4.88 4.9410-Year Note 5.21 5.31 5.3830-Year Bond 5.84 6.00 6.02Source: Cantor, Fitzgerald/Telerate