Treasury note and bond prices managed to close with small gains yesterday even though the August purchasing managers' index showed a healthy increase, providing more evidence that the manufacturing sector is on the mend.
Late in the day, the 30-year bond was up almost 1/4 point and yielding 8.03%.
Traders said activity was very quiet as participants returned to work after the long weekend. But the market continued to have a firm tone, and many traders reported seeing buyers on dips.
Treasury prices rose overnight in Tokyo and London, the dipped yesterday morning after the National Association of Purchasing Management said its index rose to 54.8% in August from 51.8% in July.
August marks the seventh month in a row the index has risen and the third month in a row it has come in above 50%. The association says readings above the 50% level signal an expanding manufacturing sector.
The report's new orders component surged to 63.1%, from 56.3% in July, and production rose to 61.4% from 49.5%. Employment also rose to 45.5%, from 41.7% in July, but still remains below the 50% level that would show it is growing.
Elias Bikhazi, a money market economist at Security Pacific National Bank, said the strength in the purchasing managers' report echoed the big gains seen in July durable goods orders, July factory orders, and the Chicago purchasing managers' August index.
"The bottom line is that manufacturing is firming better than other sectors at this point," Mr. Bikhazi said.
"The worry remains about the other sectors," such as the service sector, and the uncertainty about the condition of the rest of the economy means there is still room for the Fed to ease in the near future, he added.
Also yesterday, the Commerce Department said construction spending rose 1.6% in July, while June's change was revised to a 0.1% decline from the 0.3% increase reported last month.
The market regained its losses during the afternoon, but traders said the improvement had little significance.
"It's just short-covering," the head of a trading desk said. "It doesn't mean anything. All these guys are waiting for unemployment and they don't want to sit with short positions all week."
A note trader said expectations of another Fed ease and the lack of customer selling both contributed to the market's firm tone.
"There's really nothing stopping it right now," the trader said.
Yesterday's regular weekly bill auction went well, although the total of bids submitted was less than normal for a bill auction. The three-month bills came at an average rate of 5.34% and the six-months came at 5.39%.
Activity in the Treasury market will probably remain quiet until the August employment report is released Friday, traders said. There are no indicators at all today.
The December bond future contract closed 3/32 higher at 97 11/32.
In the cash market, the 30-year 8 1/8% bond was 3/16 higher, at 100 27/32-100 31/32, to yield 8.03%.
The 7 7/8% 10-year note rose 5/32, to 100 16/32-100 20/32, to yield 7.78%.
The three-year 6 7/8% note was up 1/32, at 100 18/32-100 20/32, to yield 6.63%.
Rates on Treasury bills were little changed, with the three-month bill steady at 5.34%, the six-month bill unchanged at 5.37%, and the year bill two basis points lower at 5.39%.
Changes at Sanwa-BGK
Sanwa Bank Ltd. has named John Knight and Shizuo Kato as co-presidents of its primary dealer in government securities, Sanwa-BGK Securities Co., the bank said today.
The two men replace Kenneth Gestal, who is leaving to pursue other interests, Sanwa said.
Robert Graustein, a senior managing director, and E. Craig Coats, who ran the trading desk, are also leaving, and William Feezer will replace Mr. Coats as head trader, the bank said.
The changes occurred because Sanwa Bank was dissatisfied with the dealership's performance, said Jorge Rodriguez, an executive vice president at Sanwa-BGK.
The bank "though the performance could be improved with a management change, which is not atypical for this business," Mr. Rodriguez added.
He said there was no comparison between Sanwa's actions yesterday and Continental's announcement Friday that it was resigning its dealership.
Sanwa "has a full commitment to the government securities business," Mr. Rodriguez said.
Mr. Kato has worked for Sanwa Bank for 20 years and served as general manager of Sanwa-BGK for the last three years.
Mr. Knight and Mr. Gestal were two of the founders of Brophy, Gestal and Knight, a fixed-income investment firm that was started in 1980.
Brophy, Gestal and Knight became a primary dealer in 1981 and Sanwa Bank acquired a controlling interest in the firm in 1988.
Sanwa said the dealership's market share has grown to more than 3%, from about 1% in 1988.