Treasury note and bond prices sagged a little in dull trading yesterday as some participants lightened positions ahead of this morning's July employment report.
Late in the afternoon, the 30-year bond was 1/4 point lower to yield 7.44%, and short-term and intermediate notes were unchanged to 1/4 point lower.
A government note trader said the day's activity consisted of "jockeying for position" ahead of the jobs data.
As the market drifted lower, "there seemed to be a little profit taking," the trader added.
The monthly employment report is always a big hurdle for the bond market because its description of economic activity sets the tone for the rest of the month. But today's report is expected to be especially confusing.
Economists say a number of factors suggest that the risk is for a stronger-than-expected July payrolls gain, including the five-week lapse since the June survey and some problems with the seasonal factors.
And over the course of this week, forecasts for the nonfarm payrolls figure ballooned as economists took into account a federal effort to provide more summer jobs for teenagers.
A survey by The Bond Buyer found 16 economists on average expected a 205,000 increase in July payrolls, up from the 115,000 forecast earlier this week, and traders yesterday were citing a 250,000 increase as the consensus forecast.
Economists, say, though, that many of the factors putting upward pressure on the payrolls number are technical rather than fundamental. Even the summer jobs program for teenagers amounts to only $500 million of stimulus, which will not have that large an impact on the U.S. economy, they say.
"Even though we may get this big increase [in payrolls], we're still seeing mixed conditions across the economy," said Daniel Seto, an economist at Nikko Securities.
Economists said the bond market will focus today on private nonfarm payrolls, a figure that excludes government workers, in order to filter out the impact of all those temporary teenage workers.
Traders said they were also interested to see how the work week and overtime hours fared in July, and if there will be any revision to June's 117,000 decline in payrolls.
But traders said that given all the warnings economists have issued about the special factors involved in today's number, it would take a huge increase in nonfarm payrolls to seriously damage Treasury prices.
The note trader said he thought the market could absorb an increase of 200,000 to 300,000 in July payrolls without being crushed, as long as retail investors did not sell heavily.
Economists are "setting us up for a big number, but once it comes out, they'll explain it away," the trader said.
The long bond underperformed the rest of the market yesterday, and a bond trader attributed that to the fact, "there's absolutely no fundamental demand" for the $10 billion of bonds to be sold next Thursday.
Participants assume the issue will be reopened in the future to ensure liquidity, which makes them less eager to buy the bonds now, he said. He added that the record low coupon that the issue will probably bear is a disincentive for portfolio managers.
The note trader agreed that the uncertainty surrounding the bond issue, and particularly the question of what securities Argentina and Brazil will but in the open market to collateralize their debt reduction deals, will keep retail investors away from the bond.
And the failure of last week's five-year auction, which plummeted in price after dealers took down the issue at the highs, will make the Street cautious about all three auctions, he said.
The bond market barely reacted yesterday to the Labor Department's report of a 69,000 jump in jobless claims, to 469,000, in the week ended July 25.
That was the largest one-week increase since 1982, but as expected, the Labor Department said General Motor's two-week shutdown last month was responsible for most of the increase. Unemployment filings from General Motors employees are expected to bloat the claims data for the next few weeks.
Anthony Vignola, chief economist at Kidder Peabody & Co., said the fact that new claims held steady around the 400,000 level, excluding the General Motors claim, was "an encouraging development."
The market also disregarded the money supply data yesterday afternoon.
A spokesman for the Federal Reserve bank of New York reported at the bank's weekly press briefing that the nation's M1 money supply rose $1.4 billion to $962.8 billion in the week ended July 27; the broader M2 aggregate rose $2.6 billion, to $3.5 trillion; and M3 increased $800 million, to $4.2 trillion, in the same period.
The September bond futures contract closed 6/32 lower at 105 4/32.
In the cash market, the 30-year 8% bond was 10/32 lower, at 106 13/32-106 17/32, to yield 7.44%.
The 7 1/2% 10-year note fell 6/32, to 106 2/32-106 6/32, to yield 6.62%.
The three-year 5 7/8% note was unchanged, at 102 31/32-103 1/32, to yield 4.69%.
In when-issued trading, the 30-year bond to be sold next Thursday was quoted at 74%, the 10-year note to be auctioned Wednesday was bid at 6.65%, and the three-year note to be sold Tuesday was yielding 4.84%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 3.16%, the six-month bill off one basis point at 3.25%, and the year bill unchanged at 3.40%.
Treasury Market Yields
Thursday Week Month
3-Month Bill 3.20 3.24 3.26
6-Month bill 3.32 3.34 3.36
1-Year Bill 3.51 3.56 3.58
2-Year Note 4.26 4.29 4.34
3-Year Note 4.69 4.73 4.83
5-Year Note 5.66 5.71 5.89
7-Year Note 6.15 6.19 6.41
10-Year Note 6.62 6.64 6.87
16-Year Bond 7.00 6.98 7.22
30-Year Bond 7.44 7.43 7.59
Source: Canto, Fitzgerals/Telerate