Treasury prices continued to rally Friday as a trio of weak economic reports fueled expectations for another easing by the Federal Reserve.
Analysts said the market's good mood should remain intact because this week's economic reports are expected to be just as pallid as Friday's numbers. But they questioned how much higher prices can go, especially at the short end, without a move by the Fed.
Late Friday, the 30-year bond was up 3/4 point and yielded 7.34%. That is still shy of the 7.31% close a week earlier.
Treasury prices were battered early last week by supply pressures, instability in the currency markets, and concerns about what might happen to the federal budget deficit after the presidential election.
The market began to turn around on Thursday, once the auctions of two- and five-year notes were out of the way. It then continued that move higher on Friday.
Paul Kasriel, a monetary economist at Northern Trust Co., said Treasury prices had been depressed because traders were worried that whichever candidate is elected would end up boosting the deficit as he attempted to rescue the economy.
But those concerns have been overridden for now by the weak economic news, he said. "The data we've seen of late suggest this economy is really going nowhere, and I think that's what the market's beginning to refocus on."
"It's a good environment for fixed-income securities," Mr. Kasriel said.
Friday's economic news included statistics on August durable goods, income and spending, and existing home sales, all of which showed more weakness than economists had expected.
Orders for durable goods decrease 0.1% in August. Most analysts thought last month's orders would bounce back from the decline posted in July and the consensus forecast called for a 1.2% gain.
The July decline was revised to 2.7% from the 3.2% drop originally reported.
Analysts said the 3.7% drop in nondefense capital goods was discouraging, as was the 0.8% decrease in unfilled orders, the 12th monthly decline in that category.
"I've never heard of a recovery where the orders backlog keeps going down," said Paul Lally, an economist at R.H. Wrightson & Associates. "It's hard to get growth when you have less and less work."
The durable goods data overshadowed the news that existing home sales declined 3.2% last month. But Mr. Kasriel said that in light of the fact that mortgage rates are at their lowest levels in 20 years, the home sales figure was a dismal one.
August personal income fell 0.5%, far below the consensus forecast for a 0.4% gain, and last month's spending was off 0.1%, marking the first decline in that series in 10 months.
Treasury traders discounted the income report to some extent because it suffered a big impact from Hurricane Andrew.
The storm subtracted 1.2% from the income figures because the Commerce Department estimated it would reduce rental income by $53 billion, wages by $5 billion, and farm income by $53 billion.
Given the day's indicators, "the market's beginning to construct a picture that another Fed easing is in the works," said Daniel Seto, an economist at Nikko Securities.
He said the Fed's next move depends on the September employment report due out on Friday.
If September payrolls excluding federally funded summer jobs show only a modest gain of 30,000 to 60,000, in line with the consensus forecast, Mr. Seto said the Fed will probably lower its funds target another 25 basis points, to 2 3/4%, and cut the discount rate by a half point, to 2 1/2%.
Most of Friday's activity occurred in the morning, traders said. They reported retail buying, which was mostly at the short end, and purchases by corporate dealers to cover hedges.
Long-term prices got an extra boost when the December bond futures contract broke above 105 16/32 late in the day. The level represented a 50% Fibonacci retracement of the recent sell-off, and "that's a pretty good technical signal, so a lot of technicians came in to buy," a bond trader said.
"The market' poised to do better next week," the trader added.
"The market will continue to have a good tone going into Friday's number," said Jan Hurley, a senior market strategist at Chase Securities. "The data that come out prior to Friday will continue to be friendly, showing ongoing weakness, and there's no supply."
The December bond futures contract closed 29/32 higher at 105 17/32.
In the cash market, the 7 1/4% 30-year bond was 22/32 higher, at 98 20/32-98 24/32, to yield 7.35%.
The 6 3/8% 10-year note rose 13/32, to 99 22/32-99 26/32, to yield 6.40%.
The three-year 4 5/8% note was up 1/4, at 100 31/32-101 1/32, to yield 4.23%.
In when-issued trading, the 4% two-year note was 6/32 higher, at 100 12/32-100 13/32, to yield 3.78%, down from the 4% stopout rate at last Tuesday's auction, and the 5 1/2% five-year note was up 1/2, at 100 21/32-100 23/32, to yield 5.33%, which compares to the 5.54% stopout rate at which it was sold last Wednesday.
Rates on Treasury bills were lower, with the 3-month bill down nine basis points at 2.81%, the 6-month bill off 10 basis points at 2.84%, and the year bill 10 basis points lower at 2.95%.
Treasury Market Yields
Friday Week Month
3-Month Bill 2.84 2.92 3.21
6-Month Bill 2.90 2.97 3.33
1-Year Bill 3.03 3.10 3.45
2-Year Note 3.78 3.79 4.15
3-Year Note 4.23 4.32 4.68
5-Year Note 5.33 5.38 5.60
7-Year Note 5.91 5.91 6.14
10-Year Note 6.40 6.39 6.62
30-Year Bond 7.35 7.31 7.42
Source: Cantor, Fitzgerald/Telerate