Yesterday's jobless claims and money supply reports both came in on the weak side, helping Treasury note and bond prices rally for the second day in a row.
The 30-year bond rose 3/8 point yesterday to yield 8.37%, its lowest closing yield since early June.
The Treasury market made most of its move early in the session when new claims for unemployment insurance rose more than expected, suggesting weakness in the labor market.
After a flurry of trading on the jobless claims number, activity slowed back down to a crawl until late in the day, when the Federal Reserve announced another week's worth of slow growth in the monetary aggregates.
The closely watched M2 money supply rose only $300 million, after falling $6.9 billion in the previous
Treasury Market Yields
Thursday Week Month
3-Month Bill 5.74 5.75 5.71
6-Month Bill 5.94 5.97 5.98
1-Year Bill 6.20 6.25 6.29
2-Year Note 6.85 6.84 6.83
3-Year Note 7.21 7.29 7.31
4-Year Note 7.35 7.46 7.50
5-Year Note 7.81 7.91 7.88
7-Year Note 8.04 8.14 8.13
10-Year Note 8.18 8.27 8.27
20-Year Bond 8.34 8.43 8.47
30-Year Bond 8.37 8.47 8.46
Source: Cantor, Fitzgerald/Telerate
week. The consensus forecast was for a rebound of $2 billion to $3 billion in M2.
Traders hope that if the various measures of the money stock, especially M2, continue to grow slowly, the Federal Reserve will decide to ease monetary policy again.
But yesterday afternoon, the market was not able to make much headway on that news.
Yesterday's numbers reinforced the impression left by Wednesday's surprisingly weak June durable goods report that the economic recovery is shaky. Analysts cautioned, though, that statistics are always mixed at this stage of a recovery.
The Labor Department said yesterday that new claims for unemployment insurance rose 30,000 to 425,000 in the week ended July 13. Economists expected a smaller increase to 410,000.
The report also showed that in the week ended July 6, the number of people receiving state benefits increased by 85,000, to 3.448 million.
Analysts said it was difficult to weigh the influence of various special factors, including the Independence Day holiday the week before.
Sandy Batten, a Citicorp economist, said the four-week moving average of new claims "continues to fall, so the claims number shows the recovery is still in place and proceeding at a moderate pace."
Some traders said yesterday's claims figure was especially significant because it was for the same week in which the survey for the July employment report was taken. But Elliott Platt, chief economist at Donaldson, Lufkin & Jenrette Securities, said he did not see much correlation between the claims figures and the monthly employment statistics.
Mr. Platt already estimated a 75,000 increase in July nonfarm payrolls and an unchanged unemployment rate. In spite of the increase in new claims yesterday, "we'll stick with that," he said.
Traders said the improvement in Treasuries yesterday and Wednesday reflects not only the favorable economic statistics and the successful five-year auction, but also good retail buying and the fact that some participants had already started setting up short positions for the refunding auctions.
A note trader reported seeing "good customer buying every day for the last three days."
Investors were extending out the curve by selling short-term paper and buying longer securities in order to lock in higher yields, traders said. And there were reports of money moving into Treasuries from the mortgage-backed and corporate markets.
Treasury prices could improve further if next week's numbers give more evidence of economic weakness, a bond trader said. "The market is up and yet it's not getting too overbought, so there's still room for it to run."
The September bond future contract closed 11/32 higher at 94 16/32.
In the cash market, the 30-year 8 1/8% bond was 3/8 higher, at 97 4/32-97 8/32, to yield 8.37%.
The 8% 10-year note rose 9/32, to 98 21/32-98 25/32, to yield 8.18%.
The three-year 7% note was up 1/16, at 99 12/32-99 14/32, to yield 7.21%.
In when-issued trading, the 6 7/8% two-year note was 1/16 higher, at 100-100 1/32, to yield 6.85%, down from the average yield of 6.94% at Tuesday's auction, and the 7 7/8% five-year note was up 9/32, at 100 6/32-100 8/32, to yield 7.81%.
Rates on Treasury bills were mixed, with the three-month bill up one basis point at 5.59%, the six-month bill steady at 5.70%, and the year bill one basis point lower at 5.87%.
Today's preliminary estimate of second-quarter gross national output is expected to show an increase, after two quarters of negative growth.
Eighteen economists surveyed by The Bond Buyer on average expect a 1.1% rise in the second quarter, following the 2.8% drop in the first quarter and the 1.6% decrease in the fourth quarter.
The positive number should not disturb the bond market, since it is widely expected.
Analysts say the component to watch will be inventories: a big decline would detract from second-quarter growth, but suggests more strength in the third quarter.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that in the week ended July 15, the nation's M1 money supply rose $600 million to $857.5 billion and M3 increased $2.2 billion, to $4.2 trillion.
Also, for the week ending Wednesday, the federal funds rate averaged 5.75%, down from 5.85% the previous week, according to the New York Fed.