Treasury notes and bonds posted modest gains yesterday, led by intermediate-term securities, as the market looked ahead to Friday's September employment report.
Late in the afternoon, the 30-year bond was up 1/4 point to yield 7.33%, while the 10-year note was up 3/8 point and the five-year note was up 1/4.
Traders said activity was subdued, with the Rosh Hashanah holiday and the absence of any economic news reinforcing the usual Monday calm.
"The market has a very firm tone," said Mary Rooney, a money market economist at S.G. Warburg & Co. "The consensus is the Fed is going to implement another rate cut after getting weak employment data."
Most economists say the Federal Reserve will cut the funds rate by a quarter-point, to 2.75%, and lower the discount rate 50 basis points to 2.5%.
But traders yesterday were talking about the possibility the Fed would go for broke and cut both the fed funds and discount rates 50 basis points, to 2.5%.
Ms. Rooney said the most popular securities yesterday were the notes maturing in five to 10 years.
She said the intermediate notes offer a big yield advantage over two-year and three-year paper, and added that the 10-year notes have benefited from the fact that they are very expensive to borrow in the repurchase market, due to corporate hedging and a possible short squeeze.
The intermediate notes also out-performed the long bond, which is still mired in worries about the presidential election, the federal budget deficit, and the dollar, she said.
Ms. Rooney expects the yield curve to remain steep until the market sees the results of the Nov. 3 presidential election.
Sung Won Sohn, chief economist at Norwest Corp., also thinks the long end will remain under pressure going into the elections.
"I think the long end will probably deteriorate in the short term," Mr. Sohn said, but added that he expects the long bond to head back toward a 7% yield once the election jitters are out of the way.
Although the newspapers were full of talk yesterday about Ross Perot's possible re-entry into the presidential campaign, traders were skeptical. "He's just playing a game here, trying to make the deficit an issue," a note trader said.
Nor did the market pay much attention to the dollar's big slide. Analysts said the dollar's overnight drop against the mark and the yen reflected the possibility of a Fed easing, the persistent of weakness of the U.S. economy, and some movement of foreign funds out of the dollar now that the European currency crisis has calmed.
Late yesterday, the dollar was quoted at 1.4505 German marks, down from 1.4830 late Friday, and at 119.53 Japanese yen, down from 120.85.
Ms. Rooney said the market would be keeping an eye on the dollar, but noted that the Treasury market is mostly under domestic sponsorship these days. Nor should the dollar's weakness have an impact on Fed policy, she said. "I don't think the Fed will let these foreign concerns outweigh their domestic concerns."
This week's array of indicators begins with today's August leading indicators and September consumer confidence report.
Economists on average expect a 0.1% decrease in the August index of leading indicators, following a 0.1% gain in July, and think the Conference Board's measure of consumer sentiment will fall to 57.0 in September from 58.0 in August.
But traders said the market was waiting for the employment report and would probably disregard all the preceding news.
The December bond futures contract closed 6/32 higher at 105 23/32.
In the cash market, the 7 1/4% 30-year bond was 7/32 higher, at 98 26/32-98 30/32, to yield 7.33%.
The 6 3/8% 10-year note rose 3/8, to 100 3/32-100 7/32, to yield 6.34%.
The three-year 4 5/8% note was up 3/32, at 101 1/32-101 3/32, to yield 4.21%.
In when-issued trading, the 4% two-year note was 1/32 higher, at 100 13/32-100 14/32, to yield 3.77%, and the 5 1/2 five-year note was up 7/32, at 100 29/32-100 31/32, to yield 5.27%.
Rates on Treasury bills were mixed, with the three-month bill down three basis points at 2.78%, the six-month bill up one basis point at 2.85%, and the year bill two basis points at 2.93%.
Treasury Market Yields
Monday Week Month
3-Month Bill 2.81 2.96 3.20
6-Month Bill 2.91 3.00 3.32
1-Year Bill 3.01 3.14 3.44
2-Year Note 3.77 3.87 4.13
3-Year Note 4.21 4.38 4.63
5-Year Note 5.27 5.43 5.57
7-Year Note 5.86 5.95 6.11
10-Year Note 6.34 6.40 6.60
30-Year Bond 7.33 7.34 7.40
Source: Cantor, Fitzgerald/Telerate