After breaking through the 8% level last week, Treasury bonds are poised for further price gains this week, analysts said.
Late Friday, the 30-year bond was off 1/8 point on the day, but up nearly a point on the week, to yield 7.93%.
Last week's price gains took the long bond to yield levels it had not visited since December 1989.
Prices suffered on Friday when the long-awaited Fed easing resulted in a severe attack of profit taking. But many analysts expect that after a period of consolidation early this week, Treasury prices will be able to continue higher, especially at the long end, since the economy remains week and price pressures seem to be under control.
Kevin Logan, chief economist at Swiss Bank Corp., expects the 30-year bond to trade between 7.80% and 8% this week, and he said it could go as low as 7 1/2% by the end of the year.
Treasury Market Yields
Friday Week Month
3-Month Bill 5.29 5.44 5.37
6-Month Bill 5.40 5.54 5.50
1-Year Bill 5.50 5.63 5.59
2-Year Note 6.15 6.23 6.25
3-Year Note 6.46 6.55 6.66
4-Year Note 6.62 6.70 6.81
5-Year Note 7.09 7.22 7.30
7-Year Note 7.43 7.56 7.62
10-Year Note 7.63 7.75 7.82
20-Year Bond 7.87 7.94 8.04
30-Year Bond 7.93 8.00 8.08
Source: Cantor, Fitzgerald/Telerate
The perception that interest rates are declining should help the long end by encouranging investors to put their money in longer-term, higher-yielding securities, analysts said.
"Under the circumstances, the only way [investors] can improve their returns is to move out the yield curve," Mr. Logan said.
He said there is little reason for investors to move out of the U.S. market into foreign bonds since long-term yields are coming down around the world.
German government bonds are still yielding more than Treasuries, allowing investors to pick up 50 basis points in yield, "but you pick up a lot of political risk at the same time," Mr. Logan said.
The steady slippage in interest rates has been painful for retain investors.
A year ago, money market funds were yielding about 7 1/2%, said Paul Single, a senior portfolio manager at Wells Fargo Bank.
"Investors would have to go out to roughly seven-year securities" to match that yield right now, he said.
Now money market funds are yielding 5% or lower, and passbook savings accounts are yielding to 5% to 5 1/4%, Mr. Single said. He speculated that a drop below 5% on passbook savings might trigger a "mass migration of funds."
But Mr. Single said investors have other choices besides extending the maturity of their holdings, which adds greatly to their price risk. Many are taking advantage of the higher rates offered by adjustable-rate mortgage funds and by global money market funds, he said.
Paul Boltz, a financial economist at T. Rowe Price Associates in Baltimore, said history provides another reason for investors to be cautious about extending out the curve right now.
"It's been several years since the Treasury bond yield has stayed below 8% for any considerable period," Mr. Boltz said. And the last time it managed to do so, in 1986, "was attributable to the collapse of OPEC and I don't see any cartel waiting to fall at the moment," he said.
While the long end flourishes, the short end may falter, Mr. Logan said, since the market had already priced in Friday's easing and "it's not likely to be repeated any time soon."
But not everyone is conviced that the Fed has made its final move.
"The way the numbers are shaping up, I think there's every indication the Fed may have to come in again," said Gary Schlossberg, a senior economist at Wells Fargo Bank. "Our feeling is the economy is going to remain fairly flat for a while."
Mr. Schlossberg is forecasting another 25-basis-point cut in the funds rate in November, but said the easing could occur as early as October if the economic indicators are weak enough.
The market may encounter a few unfriendly economic indicators as it gets started this week. Tomorrow's August industrial production report looks particularly healthy, with economists expecting an increase of about 0.5%.
But Mr. Logan said that number has been anticipated in the market since the employment report was released.
"I don't want to say people are going to ignore it, but it's not going to be new information," he said.
Treasury prices closed with only slight losses Friday after a tumultuous day of trading.
Late in the afternoon, the 30-year bond was off 1/8 to yield 7.93%.
The market improved in London and Tokyo as overseas investors responded to Thursday's favorable producer price and money supply data, and held onto those gains after Friday morning's indicators, even though the inflation news was mixed.
But after the Federal Reserve announced it was cutting the discount rate 50 basis points, to 5%, prices began to deteriorate.
"It was a classic case of selling on the news," Mr. Boltz said. "The market had so thoroughly discounted the discount rate cut that when it came, people took profits."
Later in the morning, the Fed signaled it had lowered its funds target by 25 basis points, to 5 1/4%, by adding reserves with customer repurchase agreements.
Friday's indicators added to the evidence suggesting consumer demand remains weak and price pressures are restrained.
August consumer prices rose 0.2%, a little better than the 0.3% gain the market was expecting. But the most closely watched measure of inflation, the core rate excluding food and energy costs, rose 0.4%, above the consensus forecast of a 0.3% gain.
Kathleen Stephansen, a senior economist at Donaldson, Lufkin & Jenrette Securities Corp., said the third monthly 0.4% gain in the core rate was "very disappointing."
"It does suggest price stickiness at a consumer level," she said.
On the other hand, the day's statistics on spending were straight-forwardly favorable for the bond market.
August retail sales fell 0.7%, which was weaker than expected, and sales excluding autos were off 0.2%.
Later in the day, auto manufacturers reported that their sales had deteriorated even more in the early part of September. The statistics showed sales were running at an annual rate of 5.3 million units, down from the 6.1 million rate in late August.
The December bond futures contract close 3/32 lower at 98 14/32, after trading as high as 99 10/32 during the session.
In the cash market, the 30-year 8 1/8% bond was 3/32 lower, at 102 1/32-102 5/32, to yield 7.93%.
The 7 7/8% 10-year note fell 3/32, to 101 16/32-101 20/32, to yield 7.63%.
The three-year 6 7.8% note was down 1/8, at 101-101 2/32, to yield 6.46%.
Rates on Treasury bills were mixed, with the three-month bill down two basis points at 5.16%, the six-month bill up one basis point at 5.20%, and the year bill two basis points higher at 5.23%.