Treasury notes and bonds managed to post gains yesterday even though the day's main economic indicator, the weekly jobless claims, showed more strength than expected.
Late in the day, the 30-year bond was up 1/2 point to yield 8.46%.
Traders said yesterday's rise in prices was a continuation of the rally that began Wednesday afternoon once the market had made it through the seven-year note auction.
The market's good mood after completing the auction was bolstered yesterday by some retail buying of Treasury and mortgage-backed securities, the reappointment of Federal Reserve Chairman Alan Greenspan, and expectations of a good producer price report today.
"The market certainly acted better than I thought it would have given the decline in jobless claims this morning," said Frederick Leiner, a market strategist at Continental Illinois National Bank & Trust Co.
"Part of the reason the market rallied is that people do expect a pretty decent PPI number," Mr. Leiner added. "That is one factor the bulls have been able to point to all along, the inflation numbers are good."
Analysts surveyed by The Bond Buyer expect a 0.1% decline in June producer prices and a 0.1% gain in June prices excluding food and energy costs.
Although the market managed to rally despite bad news yesterday, Mr. Leiner said it would be difficult to ignore a bad producer price report.
"If [the] number comes in stronger than anticipated, it will be the second strong number in a row, and unless it's due to special factors, I think the bond market will have a hard time with it," he said.
In May, producer prices rose 0.6% and the core rate was up 0.4%.
Prices did dip briefly yesterday after the Labor Department reported that jobless claims fell 35,000, to 388,000, for the week ended June 29. Analysts had been calling for
Treasury Market Yields
Thursday Week Month
3-Month Bill 5.71 5.71 5.74
6-Month Bill 5.93 5.92 6.06
1-Year Bill 6.23 6.36 6.37
2-Year Note 6.87 6.96 7.02
3-Year Note 7.31 7.34 7.42
4-Year Note 7.49 7.49 7.61
5-Year Note 7.92 7.91 7.97
7-Year Note 8.15 8.12 8.19
10-Year Note 8.27 8.23 8.31
20-Year Bond 8.46 8.41 8.50
30-Year Bond 8.46 8.41 8.50
Source: Cantor, Fitzgerald/Telerate
declines of 5,000 to 20,000.
The Labor Department said that was the lowest level claims had reached since the week ended Sept. 1, 1990, when 386,000 new claims were filed.
In another piece of bad news for the bond market, the number of people receiving state benefits fell 119,000, to 3.41 million.
Both numbers indicate the labor market is continuing to recover. But analysts said the report may not be quite as strong as it looks, since the drop in new claims could be partly due to seasonal factors and since it is hard to tell whether state unemployment rolls are declining because people are getting jobs or because they have used up their benefits.
After moving lower on the jobless claims data, Treasury prices soon recovered amid reports of purchases of bond futures contracts and buying of mortgage-backed securities.
Sales of mortgage-backed securities are good for the government market because dealers hedge their mortgage-backed inventories by establishing short positions in intermediate Treasuries. Once they sell the mortgage-backeds, they can get rid of the hedge by buying Treasuries.
The Bush administration's reappointment of Federal Reserve Chairman Alan Greenspan, which was announced late Wednesday, had little effect on Treasury prices overnight, but traders said it was helping the market's tones.
The market also seemed to ignore the Bundesbank announcement yesterday that it had not raised its interest rates.
The September bond future contract closed 9/16 higher at 93 11/32.
In the case market, the 30-year 8 1/8% bond was 1/2 point higher, at 96 7/32-96 11/32, to yield 8.46%.
The 8% 10-year note rose 5/16, to 98 1/32-98 5/32, to yield 8.27%.
The three-year 7% note was up 1/16, at 99 4/32-99 6/32, to yield 7.31%.
In when-issued trading, the 8 1/4% seven-year note was 5/16 higher, at 100 12/32-100 16/32, to yield 8.15%, down from the 8.26% average at Wednesday's auction.
Rates on Treasury bills were little changed, with the three-month bill one basis point lower at 5.56%, the six-month bill unchanged at 5.69%, and the year bill one basis point lower at 5.88%.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply rose $3.5 billion to $862.1 billion in the week ended July 1; the broader M2 aggregate was unchanged at $3.4 trillion; and M3 dropped $9.1 billion, to $4.2 trillion, in the same period.
Also, for the week ending Wednesday, the federal funds rate averaged 5.79%, down from 6.34% the previous week, according to the New York Fed.