Long bond poised to hit 6.00% if employment report is weak.

Yields continued to grind lower yesterday, and participants believe a 6% yield on the long bond is well within reach today pending a weak employment report.

The 30-year bond closed up 20/32 at a yield of 6.03%, the lowest level since the Treasury began auctioning 30-year bonds on a regular basis in 1977.

Treasuries posted gains across the yield curve as a number of factors conspired to bring buyers into the market. Supporting factors included a sharp decline in new factory orders, a drop in gold prices, central bank buying of short and intermediate Treasuries.

"The gains were driven by central bank buying and we saw light retail activity," said Joseph Liro, chief economist at S.G. Warburg & Co. Liro said that prices rose at the hands of moderate buying interest and a general lack of sellers in the market.

Traders said the Federal Reserve, Bank of Japan and Bundesbank were active buyers yesterday. Talk in the market was that the Fed was buying 5-year and 10-year notes under the table. Traders speculated that the Fed was purchasing securities on behalf of European central banks which are looking to reinvest U.S. dollars purchased during recent intervention attempts in the foreign exchange markets.

The Bank of Japan, which has purchased dollars steadily to prop up the flagging currency against the yen, was said to be an aggressive buyer of intermediate Treasuries.

The Bundesbank was also active in the market. Participants said that the German central bank sold Treasury bills for two-year, three-year, and five-year notes in a move to increase the duration of its portfolio.

Energy prices were another supporting factor yesterday. Crude oil held below $18 per barrel throughout the session, despite reports that supply from Nigeria had been reduced by labor strikes.

Retail interest was moderate yesterday, as few accounts were willing to place bets on the market ahead of today's employment report for August. Weak economic data forced some accounts into the market to cover short positions which were established in expectation that the market would consolidate yesterday.

New factory orders in July fell 2.1%, the fourth decline in the last five months, the Commerce Department reported. It was the largest monthly drop since December 1991.

Analysts said the report supported the weakness indicated by yesterday's National Association of Purchasing Manager's index and bodes ill for the manufacturing component of tomorrow's employment report.

"Factory orders were surprisingly weak and shows that the manufacturing sector of the economy remains weak," said Daniel Seto, economist at Nikko Securities. Seto said that the pockets of strength in the manufacturing sector are not translating into employment growth.

The August Chamber of Commerce business confidence index fell for the third straight month in July, falling to 45.6 from 47.7. The sales, employment, and economic outlook components of the index posted declines from the previous survey.

Because most respondents to the survey are small businesses -- the sector of the labor market normally associated with job creation -- participants said the results supported the view that conditions in the economy remain soft. Surveys such as this, coupled with a barrage of layoffs at larger companies, provide a grim outlook for employment growth, participants said.

The market paid little attention to a decline in initial jobless claims, as all eyes remain on today's August employment report.

Claims fell 7,000 in the week ended Aug. 28 to 324,000. Though claims fell more in the week than most analysts had expected, the report had no significant effect on the market.

Matthew Alexy, senior market strategist at First Boston, said the claims data was a non-event for the market and said little about the state of the economy. Despite the decline in claims in the latest week, he said the overall number receiving emergency claims has remained relatively high.

The market is anxiously awaiting the jobs report today because it will provide participants with their first comprehensive look at the economy's performance in August.

While recent reports provided further evidence that the economy continues to struggle and that the employment sector is still in a slump, market sources said that further evidence of weakness is needed to justify the lofty levels of prices.

Particularly against the backdrop of a surprising upward revision to second-quarter gross domestic product, the jobs report will help the market figure out whether the rally will continue or if a correction is warranted.

Estimates for the jobs report center on an increase of about 150,000 non-farm payroll jobs and a slight rise in the civilian unemployment rate to 6.9%, according to a survey of economists conducted by The Bond Buyer.

Should the report come in near expectations and support the weak economic scenario being played out in the market, dealers expect the long bond to break below the 6% yield level.

But should the data show that the employment sector grew strongly in August, participants believe that the long bond could lose one full point in price, which would translate to a yield of about 6.10%.

Late yesterday, the Fed reported its weekly money supply figures. In the latest reporting period, M1 rose $1.1 billion, M2 fell $1.6 billion, and M3 fell $3.1 billion.

In futures, the September contract ended up 23/32 to 120.08.

In the cash markets, the 3 7/8% two-year note was quoted late yesterday Up 3/32 at 100.03-100.04 to yield 3.80%, the 4 3/4% five-year note ended up 7/32 at 99.30-100.00 to yield 4.75%, the 5 3/4% 10-year note was up 11/32 at 102.19-102.21 to yield 5.40%, and the 6 1/4% 30-year bond was Up 21/32 at 102.27-102.29 to yield 6.03%.

The three-month Treasury bill was up two basis points at 2.99%, the six-month bill was also down two basis points at 3.09%, and the year bill was down three basis points at 3.21 %.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.03 3.05 3.106-Month Bill 3.16 3.17 3.271-Year Bill 3.31 3.32 3.512-Year Note 3.80 3.82 4.103-Year Note 4.13 4.13 4.385-Year Note 4.75 4.77 5.157-Year Note 5.00 5.03 5.4410-Year Note 5.40 5.41 5.8330-Year Bond 6.03 6.09 6.51Source: Cantor, Fitzgerald/Telerate

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