Long-term Treasury prices closed with slight gains yesterday, having retraced their morning losses on a stronger-than-expected report from the Philadelphia Fed.
Late in the day, the 30-year bond was up 1/8 point to yield 7.42%.
Traders said the bounce back from the day's lows shows the market is still in good shape.
"Basically the market has had a more positive tone to it over the last few days," said James Kenney, head of Treasury trading at Prudential Securities.
The market ignored yesterday's first two indicators, the 22,000 rise in new jobless claims and the unexpectedly narrow $7 billion October trade deficit.
Analysts said they had expected claims to improve in the week ended Dec. 5, after the Thanksgiving holiday contributed to a big decline the previous week.
Economists were surprised by improvement in the trade deficit, which dropped 18% from the revised $8.58 billion September gap, but said the deficit would probably widen again in coming months.
The trade gap narrowed as exports rose 3.4% to a record $39.2 billion, confounding expectations that the weak state of many of the U.S.'s trading partners would curb the nation's sales abroad.
After drifting higher early in the session, prices bumped lower when the Federal Reserve Bank of Philadelphia reported that its diffusion index of December manufacturing activity had jumped to 31.5 from the November reading of 16.6.
The index posted a negative 4.7 reading in October.
The Philadelphia Fed said the businesses it surveyed reported gains in shipments and new orders, declines in inventories, and steady employment levels.
"That number being up a great deal more than people expected caused the market to trade off," Kenney said.
But the market began to improve later in the morning, and by the end of the day had erased almost all of its losses on the Philadelphia Fed report.
Traders said the Federal Reserve's under-the-table purchase of short-term notes helped the market recovery, as did retail buying.
A note trader said there has been consistent buying at the front end since Tuesday morning, with some of the purchases related to yearend positioning. When prices fell yesterday, some investors saw the lower levels as a buying opportunity, he said.
Peter Mayers, assistant treasurer at Bank Julius Baer, said he wouldn't read much into yesterday's price action.
"More than anything, it's just thin markets, and the technicians are the only ones trading," he said.
Mayers said the market's volatility was also exacerbated by what he called the December effect:
"People aren't willing to let positions sit there," he said. "As soon as you have a few ticks of profit, you take them."
Scott Winningham, chief market analyst at Stone & McCarthy Research Associates, said yesterday's close left prices in the same narrow range they have inhabited for the last week or so.
Winningham said he thinks the market is likely to break out of the trading range soon, and he favors a move to the upside.
"Even with a growing economy, the Fed is basically on hold," he said. "We're not talking about any kind of strong growth with inflationary implications, so the market can do better, at the long end that is."
Yesterday's report on the money supply had no impact on Treasury prices.
A spokesman for the Federal Reserve Bank of New York said at the bank's weekly news briefing that the nation's M1 money supply rose $2.4 billion, to $1 trillion in the week ended Dec. 7; the broader M2 aggregate rose $6.3 billion, to $3.5 trillion; and M3 declined $100 million, to $4.2 trillion.
The March bond futures contract closed [UF32.sup.1] higher at 104 4/32
In the cash market, the 7 5/8% 30-year bond was 3/32 higher, at 102 10/32-102 14/32, to yield 7.42%.
The 6 3/8% 10-year note rose 3/32, to 97 12/32-97 16/32, to yield 6.73%.
The three-year 5 1/8% note was unchanged, at 99 29/32-99 31/32, to yield 5.13%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 3.20%, the six-month bill up three basis points at 3.37%, and the year bill one basis point lower at 3.56%.
In other news, the New York Fed reported the federal funds rate averaged 2.93% for the week ended Wednesday, down from 2.94% the previous week.