The Treasury market yawned through another lackluster session yesterday as players slowly rose from their Labor Day and Rosh Hashanah slumber. Government securities traded in a tight range with traders reacting dispiritedly to a weaker dollar and more inflation news.
The benchmark 30-year Treasury bond closed down 3/8 of a point yesterday, to yield 7.56%, as the market focused on rising commodities prices, signs of strength in last Friday's August employment numbers, and weak dollar trading.
Steven R. Ricchiuto, chief economist at Barclays de Zoete Wedd Securities Inc., said the lackluster day got its start with weakness in overseas trading that carried over to the opening of the New York markets.
But although the dollar has shown weakness all week, Ricchiuto said it was "not the main factor" that moved the market lower yesterday.
Domestic accounts are exerting more pressure on Treasuries by selling into the market every time it rises slightly, which helps move the market right back down, Ricchiuto said. Compounding the effect is limited domestic buying resulting from people taking a closer look at the earlier inflation nUmbers, he added.
"Retail continues to accrue cash every time there's an uptick," Ricchiuto said. "It's not any one particular number; it's an accumulation of data."
Adding to the glum mood yesterday was the mid-morning release of the wholesale trade inventories for July and the revised reading on secondquarter productivity and costs. The revised figure for U.S. second quarter nonfarm productivity saw the biggest drop in more than five years, falling to down 2.5% from down 1.2%, and unit labor costs were up. Both of these factors pointed toward inflation, economists said.
"The sell-off here is that interest rates are going up," said Jim Somers, who runs Treasury arbitrage accounts for Somers Asset Management Inc. in Radnor, Pa. Somers predicted that interest rates will climb even higher during the next year.
Overall, the trend in growth remains strong, and leading indicators of inflation continue to rise, according to a report from Morgan Guaranty Trust Co.
Although the first major reports for August were a bit weaker than expected, "they point to little change in the economy's strong trend," Morgan Guaranty' s Data Watch said, "The forecast continues to incorporate the view that a significant slowing in growth is unlikely without substantially more Fed tightening."
Elsewhere, economists are watching the weak dollar and its possible effect on the bond market. Currency traders have steered their attention toward the German mark this week, pushing it higher against most major currencies. German manufacturing is showing much more strength than expected, while employment numbers are mixed.
Meanwhile, trade talks yesterday in Washington between U.S. trade representative Mickey Kantor and Japanese trade minister Ryutaro Hashimoto continued throughout the day.
The Clinton Administration has threatened to introduce sanctions against Japan if no agreement has been reached by a Sept. 30 deadline. Yesterday, however, Kantor said that the United States will not make such threats at a meeting in Los Angeles this week with American, Japanese, Canadian, and European trade representatives.
In sluggish holiday trading Tuesday, the dollar was quoted at 1.5430 German marks and 99.11 Japanese yen on the day. Yesterday, the dollar closed at 1.5510 marks and 99.42 yen.
The 10-year Treasury note was down 1/4 of a point to yield 7.27%. The sevenyear note was down over 1/8 of a point to yield 7.07% and the five-year was down 1/8 of a point to yield 6.88%.
The yield on the three-month bill was down. two basis points to 4.64%. The yield on the six-month bill was down one basis point to 5.05%, and the yield on the one-year was unchanged at 5.54%.
The September Treasury bond futures contract closed unchanged at 94.97, off a high of 94.98 and a 10w of 94.96.
In the corporate market, non-investment grade bonds finished unchanged, while high-grades moved slightly lower in line with Treasuries.
A high-yield trader said the market was quiet, with very little trading underway. "The market is virtually unchanged," the trader said,
What would make the market move? "I'm waiting for the investing community to start investing again in a slightly aggressive way," the trader said. "We know there's money out there. We know there's bonds to be sold out them, and people are going to buy bonds sooner or later."
A highlight of a dull day was provided by Eastman Kodak paper, with spreads tightening about 10 basis points in five- to 10-year maturities, another trader said. He attributed the change to Johnson & Johnson's agreement to buy Eastman Kodak's clinical diagnostics unit for more than $1 billion.