Long Bond Up 5/8 to Yield 7.78% As Fed Holds Policy Unchanged

Treasury prices managed to improve, especially at the long end, on Friday's long-awaited September employment report, even though the numbers did not evoke the immediate Fed ease the market was expecting.

Late Friday, the 30-year bond was up 5/8 point to yield 7.78%.

Traders started the day Friday hoping the employment statistics would show so much weakness that the Fed would ease immediately.

Although that was not the case, traders and analysts said the report was weak enough that they still hope for a Fed easing sometime this week or next.

"I don't think the market is going to give up hope, so I think the bullish undertone is going to persist," said Jan Hurley, a senior market analyst at Chase Securities.

September non-farm payrolls increased by 24,000 jobs, which was close to the consensus forecast of a 30,000 gain, but at the same time the Labor Department reported payrolls were in better shape in July and August than was previously thought.

August's gain was revised up to 77,000 from the 34,000 increase reported last month, and July's decline now stands at 26,000, from the 73,000 decrease reported last month.

And in another bit of unfavorable news for the bond market, the unemployment rate fell 0.1% to 6.7%. Economists expected the rate to rise to 6.9%.

Even though payrolls rose, economists said the gains were modest for this stage of a recovery and show the economy is coming out of the recession very slowly.

Most expect another ease from the Fed but said policymakers will wait to see more economic reports before making any change in policy.

Some traders think it's possible the Fed will move today or tomorrow, but the majority seemed to be hoping for an easing in a week or so, after the Fed sees September inflation and retail sales reports.

David Jones, chief economist at Aubrey G. Lanston, said press reports have suggested that Fed Chairman Alan Greenspan is cautious about easing again.

Mr. Jones suggested that a move late next week, after the September statistics are in, would match the successful timing of the Fed's last easing move in September.

"My feeling is the Sept. 13 move went off very well because Mr. Greenspan let economic and monetary numbers play out, and when he eased the move was well received," Mr. Jones said.

The real question may be what happens to prices once the Fed eases.

Traders who think this will be the last cut in rates from the Fed say that once the ease is in place the short end will sell off, causing the curve to flatten.

Other traders are wary of the long end, saying that participants are likely to take profits in that area in anticipation of the refunding auctions coming up in November.

Then there are economists and traders who argue the economy is showing so little get-up-and-go that this ease is by no means the last, which means rates at both ends of the yield curve can continue to move lower.

Lacy Hunt, chief economist at Hongkong Bank Group, is one analyst who sees further easings down the road.

"There's no momentum in the economy," Mr. Hunt said. "The Fed's going to have to do a lot here."

Mr. Hunt expects the 30-year bond to drift unevenly lower to 7 1/2% by the end of this year. Next year, the long bond could go as low as 7%, he said.

Ms. Hurley of Chase Securities said it was possible the Fed would throw the market a curve by undertaking some alternative solution to the weakness in money and credit supply measures.

Talk of new solutions has been in the air recently. At a White House meeting on Sept. 27, Mr. Greenspan, President George Bush, and the president's economic advisers reportedly discussed steps such as changing capital regulations for banks. And the short end got a boost last Thursday afternoon on a rumor, later denied by the Fed, that policymakers were considering allowing banks to count Treasury bills toward their reserve requirement.

"If any alternative approach is adopted, people are going to say that means the Fed's not going to ease again," Ms. Hurley said.

Between now and Friday's numbers, there is almost no data to get prices moving. But the market does get supply on Wednesday, when the Treasury will auction $9.25 billion of seven-year notes.

The seven-years are sometimes seen as an awkward maturity, but intermediate Treasuries have been popular recently with investors trying to extend the maturity of their holdings, so the auction should go well.

The December bond future contract closed 21/32 higher at 100 13/32.

In the cash market, the 30-year 8 1/8% bond was 21/32 higher, at 103 26/32-103 30/32, to yield 7.78%.

The 7 7/8% 10-year note rose 13/32, to 98 15/32-98 19/32, to yield 7.80%.

The three-year 6 7/8% note was down 7/32, at 99 20/32-99 22/32, to yield 6.99%.

In when-issued trading, the seven-year note to be auctioned Wednesday stood at 7.14%.

Rates on Treasury bills were mixed, with the three-month bill steady at 5.02%, the six-month bill down three basis points at 5.06%, and the year bill three basis points lower at 5.05%.

Salomon Pays Freddie Mac

Salomon Brothers said Friday it would pay a fine to the Federal Home Loan Mortgage Corp. for inflating customer orders when bidding for the agency's debt securities.

While Salomon paid up, the Public Securities Association announced late Friday that Freddie Mac had agreed to extend the deadline for complying with the penalties until Monday morning.

On Thursday, Freddie Mac announced the penalties, which also include a year's probation, for members of its dealer group who had broken bidding rules, and said dealers had 24 hours to say whether they would comply.

In light of the investigations going on, including one by the Securities and Exchange Commission, the PSA argued that 24 hours was not enough time for dealers to analyze the decision.

Apparently at least 18 of the 25 dealers in the selling group violated the rules.

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