Treasury prices fell sharply Friday as the June employment report brought home to the market the fact that the economy has begun to pull out of the recession.
At the end of the shortened trading session, the 30-year bond was 3/4 point lower to yield 8.48%.
Analysis said the jobs data confirmed other statistics showing that a modest recovery has begun. But that news seemed to come as a shock to the Treasury market, which had managed to rally a little recently despite some strong economic statistics.
But after Friday's jobs report, "the Street has seen too much data suggesting an economic turnaround," a government bond trader said. "Those who were devotees of
Treasury Market Yields
Friday Week Month
3-Month Bill 5.73 5.70 5.72
6-Month Bill 5.95 5.92 5.98
1-Year Bill 6.39 6.30 6.36
2-Year Note 7.01 6.89 6.97
3-Year Note 7.41 7.26 7.40
4-Year Note 7.57 7.43 7.55
5-Year Note 7.99 7.87 7.94
7-Year Note 8.21 8.10 8.15
10-Year Note 8.32 8.22 8.27
20-Year Bond 8.46 8.41 8.48
30-Year Bond 8.48 8.40 8.46
Source: Cantor, Fitzgerald/Telerate
a double-dip scenario are kind of losing heart."
According to that scenario, the rebound in the economy would not be sustainable and the economy would soon dip back into recession.
Some traders said the market may have overreacted on Friday, since retail investors were largely absent and dealers' trading desks were only partly staffed.
Others predicted prices will fall further today, when participants who were absent on Friday come in and see the damage that occurred.
The employment report's headlines did not look that bad. June nonfarm payrolls fell 50,000, when the street consensus had been for a small increase, and the unemployment rate rose 0.1-point, to 7.0%.
But June's decline was offset by a big upward revision to May's payrolls number, which now stands at 119,000, double the 59,000 increase reported last month.
And economists said the rise in the jobless rate was meaningless, since it is a lagging indicator and often continues to rise in the early months of a recovery.
Michael Niemira, a business economist at Mitsubishi Bank, said the June report was consistent with an economic recovery.
Averaging out the May and June data, "payrolls were up 34,000 per month, so that's still constructive for the economy," Mr. Niemera said.
Manufacturing payrolls declined by 59,000 jobs in June, more than erasing the small May gain. But traders ignored the drop in manufacturing jobs and worried instead about increases in the factory workweek and overtime.
The report showed a 0.4-hour rise in the factory workweek, to 40.8 hours, and a 0.3-hour surge in overtime, to 3.7 hours.
Mr. Niemira said the rise in hours worked was the key portion of the report, since it suggested manufacturers are increasing production by getting more work out of their current employees, rather than by adding new one. That is a pattern frequently seen as the economy begins to emerge from recession.
"Typically, coming out of a recession you expect hours to pick up, and they have," he said. "All the things that usually precede a strong pickup in employment are falling into place."
Matthew Alexy, a money market economist at Deutsche Bank Government Securities, said the rise in hours worked and in overtime means June industrial production will be up.
The bond market was also concerned about the jump in wages that occurred in June. Average hourly earnings rose 0.6% to $10.38, following 0.4% gains in the two previous months.
The Bureau of Labor Statistics said the increase in overtime, which is compensated at a higher rate, was to blame for the rise in wages.
But some economists said they were still troubled by the earnings figure, since it has been above trend a few times in recent months.
Even if the June increase was the result of special factors, "it looks as if the recession didn't do much to bring down wage gains, which is disappointing," said Martin Mauro, a senior economist at Merrill Lynch.
The 30-year Treasury bond fell 1/2 point after the employment report came out, sat still for the rest of the morning, then lost another 1/4 point at midday.
The September bond future contract closed 15/16 lower at 92 25/32.
In the cash market, the 30-year 8 1/8% bond was 13/16 lower, at 95 30/32-96 26/32, to yield 8.32%.
The 8% 10-year note fell 19/32, to 97 22/32-97 26/32, to yield 8.32%.
The three-year, 7% note was down 3/16, at 98 28/32-98 30/32, to yield 7.41%.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 5.58%, the six-month bill three basis points higher at 5.71%, and the year bill up two basis points at 6.02%.
This week, everything on the calendar looks relatively innocuous.
Dealers must bid on $9 billion of seven-year notes Wednesday, but the intermediate area is the cheapest on the curve, so the auction should go well.
Friday's numbers, the June producer price and retail sales reports, will be mixed.
June retail sales will show another big gain in line with the 1% rise in May, economists said. But a lot of that strength is due to the surge in June car sales, so it may already be accounted for in Treasury prices.
Economists are expecting ly small increases in June producer prices, and some say the favorable inflation outlook could give the market a boost in the weeks ahead.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply fell $1.9 billion to $858.6 billion in the week ended June 24; the broader M2 aggregate dropped $9.6 billion, to $3.4 trillion; and M3 decreased $14.3 billion, to $4.2 trillion, in the same period.
Also, for the week ending last Wednesday, teh federal funds rate averaged 6.34%, up from 5.79% the previous week, according to the New York Fed.