Treasury prices fell Friday on a set of indicators that suggested an economic recovery may be just around the corner.
Friday's sell-off erased a large part of Thursday's gains, with the 30-year bond closing 1/2 point lower to yield 8.26%.
Prices began to slip lower early in the session when the April index of leading indicators rose 0.6%, a bit more than the 0.4% gain the market expected.
More importantly, the April increase was the third in a row, following gains of 1.2% in March and 0.7% in February. Traditionally, three increases in a row in the index signals that the economy is emerging from a recession.
The sell-off really got going at mid-morning when the Chicago purchasing managers' index for May showed a huge increase.
On a seasonally adjusted basis, the Chicago May index rose to 49.2% from the 40.9% reading in April.
Almost all the components of the index showed gains, and both production and new orders posted big jumps that put them above 50%.
The Chicago report is important because it suggests that today's more comprehensive national purchasing managers' index for May will also show bigger-than-expected gains.
Economists had expected the national index would rise about two points from the 42.1% reading in April, but some revised their estimates higher after seeing the Chicago report.
The market paid little attention to the 1.8% gain in April factory orders, which was a little stronger than expected.
Friday's indicators "point to the fact that the recession is in the process of bottoming out," said David M. Jones, chief economist at Aubrey G. Lanston & Co.
Mr. Jones said the recession will probably end during this quarter "and we could see hints of recovery in the second half of the year."
But he cautioned that other numbers released early last week suggest "the recovery, once it begins, will be abnormally weak and fragile."
He cited the decline in May consumer confidence reported last Tuesday and the 0.1% slide in April spending reported on Thursday.
Mr. Jones expects interest rates "to hold near current levels over the near term."
Short-terms prices are likely to trade sideways as long as Federal Reserve policy remains on hold, which Mr. Jones suspects could be until sometime in the fourth quarter.
And at the long end, he said there is a standoff between "further price moderation, which should be a positive, countered by negatives including extremely high Treasury supply and also a world capital shortage."
This Week's Activity
The Treasury market will spend this week waiting for Friday's May employment report, but some analysts question whether the number will be worth the wait.
Treasury Market Yields
Friday Week Month
3-Month Bill 5.68 5.53 5.61
6-Month Bill 5.91 5.84 5.80
1-Year Bill 6.15 6.06 6.06
2-Year Note 6.68 6.66 6.79
3-Year Note 7.06 7.04 7.08
4-Year Note 7.27 7.29 7.33
5-Year Note 7.70 7.67 7.64
7-Year Note 7.91 7.93 7.89
10-Year Note 8.05 8.07 8.03
20-Year Bond 8.26 8.29 8.22
30-Year Bond 8.26 8.29 8.22
Source: Cantor, Fitzgerald/Telerate
"The employment report will not provide the conclusive evidence people need to get involved in the long end," said Anthony Karydakis, a senior financial economist at First National Bank of Chicago.
Mr. Karydakis said narrow price ranges and trendless trading have discouraged investors from participating in the Treasury market in recent weeks. The May jobs report is not likely to provide the direction the market lacks, he said.
Mr. Karydakis expects the May data to give more "wishy-washy" indications that the economy is bottoming out, but the recovery is likely to be anemic.
Other analysts pointed out that the Labor Department will make its annual benchmark revisions this month, making it harder to place the May statistics into historical context. And they said traders may be confused by a rebound in the unemployment rate; most economists think the jobless rate will bounce back to 6.8% from the 6.6% rate in April.
Economists are forecasting declines of 50,000 to 150,000 in non-farm payrolls. In April, payrolls fell 124,000, and over the last six months, the average monthly decline has been 207,000.
Although the employment report is the key to this week's trading, today's national purchasing managers' index for May and tomorrow's 10-day car sales also have the potential to move prices, analysts said.
Mr. Karydakis said that over the last couple of months, "weak car sales were the most encouraging sign the recovery's not going to be strong."
The June bond future contract closed 1/2 point lower Friday, at 95 24/32.
In the cash market, the 30-year 8 1/8% bond was 17/32 lower, at 98 12/32-98 16/32, to yield 8.26%.
The 8% 10-year note fell 9/32, to 99 17/32-99 21/32, to yield 8.05%.
The three-year 7% note was down 7/32, at 99 24/32-99 26/32, to yield 7.06%.
Rates on Treasury bills were higher, with the three-month bill up eight basis points at 5.53%, the six-month bill up four basis points at 5.67%, and the year bill eight basis points higher at 5.81%.