Friday's rally continued into yesterday' session, reflecting hope that recent positive economic indicators will dissuade President-elect Bill Clinton from a major fiscal stimulus package that would raise the deficit.
The long bond finished the day near its highs, up 3/8 point, to yield 7.45%. Note prices were higher as well, and bill rates fell.
Good economic news typically weighs on prices because it raises the expectation of higher inflation. But the current market sentiment is that an improving economy will help avert the other bane of the Treasury market -- a higher deficit.
"We've been erasing the decline from the Thanksgiving holidays, along with some curve steepening," one note trader said.
He added that short covering played a large role in yesterday's price increases.
In addition, market participants say the light December activity is creating volatility that exaggerates price swings.
A bond trader said activity late in the day featured investors buying the bond and selling the five-year note.
Positive sentiment about the direction of the economy helped the market overcome an employment indicator Friday that might otherwise have forced prices lower.
November nonfarm payrolls rose 105,000, more than economists expected, and both October and September payrolls were revised higher.
The November unemployment rate slipped two-tenths, to 7.2%, which was also better than expected.
"The market took heart from the employment data," said Ram Bhagavatula, chief economist at Citibank. "This is a continuation of Friday's rally."
Bhagavatula said the Treasury market's yield levels had risen too far to be maintained.
"There was a fundamental disparity between where the economy is and where bond yields were," he said.
An article in The New York Times yesterday quoted Clinton advisers who agreed that the need for a stimulus package has diminished in recent weeks.
Robert B. Reich, the head of Clinton's economic transition team, said, "If, come January, employment is substantially on the rebound, then obviously there's less need -- there may be no need -- to take immediate action" to stimulate the economy in the short term.
Short-term prices, meanwhile, are benefiting from comments by Federal Reserve officials suggesting there is little need to tighten monetary policy.
Minneapolis Fed President Gary Stern said in a speech yesterday that growth has been anemic for the last six quarters and is still sluggish, supporting the notion that the Fed is not likely to tighten monetary policy anytime soon.
Fed Governor Lawrence Lindsey and the Dallas Fed's Robert McTeer are scheduled to give speeches today, in which market participants will seek verification of their Fed expectations.
The March bond futures contract close 1/2 point higher, at 105 4/32.
In the cash market, the 7 5/8% 30-year bond was 3/8 point higher, at 101 30/32-101 2/32, to yield 7.45%.
The 6 3/8% 10-year note rose 7/32, to 97 1/32-97 5/32, to yield 6.77%.
The three-year 5 1/8% note was up 5/32, at 99 26/32-99 28/32, to yield 5.17%.
Rates on Treasury bills were lower, with the three-month bill down one basis point, at 3.26%, the six-month bill off four basis points, at 3.36%, and the year bill three basis points lower, at 3.55%.
In other news yesterday, the Federal Reserve reported that consumer credit in October rose $214 million, higher than the market expected. Much of the increase came from a $1.6 billion rise in revolving credit.
The October increase followed a revised $1.44 billion, or 2.4% gain, in September.
For the rest of the week, Bhagavatula said today's release of the Johnson Red Book will be watched closely for signs of how the Christmas shopping season is affecting retailers.
"We think Christmas will be better than the last three years, so no surprises there," he said.
In addition to the Red Book, the market will get the retail sales figure for November on Friday, as well as the producer price index and consumer price index, which will be released on Thursday and Friday respectively.
Treasury Market Yields
Monday Week Month
3-Month Bill 3.31 3.33 3.13
6-Month Bill 3.44 3.56 3.38
1-Year Bill 3.67 3.80 3.60
2-Year Note 4.62 4.79 4.53
3-Year Note 5.17 5.34 4.99
5-Year Note 6.05 6.21 6.05
7-Year Note 6.42 6.58 6.54
10-Year Note 6.77 6.92 6.96
30-Year Bond 7.45 7.59 7.72