Treasury prices found a new range last week and are likely to remain there, since the current levels take into account the incipient economic recovery, analysts said.
The turning point came Thursday morning, when the market was hit hard by an array of unfavorable numbers, including the 0.4% rise in the core rate of May producer prices and the 38,000 drop in weekly jobless claims.
The statistics, which confirmed the rebound in economic activity and cast doubt on the market's hopes for lower inflation rates, sent the long bond back to an 8.62% yield, but that was the worst of it.
At 8.62%, retail investors were eager to buy, setting off a rally that pushed the 30-year yield back to 8.45% by late Friday afternoon.
Economists said the rebound suggests Treasury prices have factored in the upturn in the economy.
"For the time being, we've reached a quasi-equilibrium in which the range will be 8 3/8% to 8 5/8%" on the 30-year bond, said Lacy Hunt, chief economist in the U.S. for the HongkongBank group. "The market has digested and discounted the improvement that took place in the economy in May."
Mr. Hunt said upcoming statistics that will also reflect the upturn in May, such as next week's personal income and leading indicator reports, will be old news for the market, and traders will focus instead on the information on this month's activity due out in July.
Ward McCarthy, a managing director at Stone & McCarthy Research Associates, also expects yields to remain around current levels, with 8 5/8% the high end of the range for the 30-year.
Mr. McCarthy said Treasury prices could improve in the months ahead as the market realizes that the strength seen in the economy last month is not sustainable.
The indicators "all benefited from an unusually warm May," he said. "As we move through spring and summer, I think we'll continue to see growth, but it will be tepid."
Robin Marshall, chief economist in London for Chase Securities, is also optimistic about the bond market's prospects six months from now.
Over the next month to six weeks, though, he thinks lower prices are a possibility, "particularly if the May numbers are repeated in June."
Stronger economic numbers may get traders worried that the rebound will cause price pressures, Mr. Marshall said. He noted that the economy is entering this recovery with capacity utilization at 78%, about 10 points higher than at the beginning of the 1982 recovery.
So far, the decline in inflation has been modest compared to other recoveries, which could reflect the higher level of capacity usage, he said. "The market is still sensitive to inflation, and that may mean the risk premium needs to stay in the long end."
Meanwhile, supply will become a factor again this week, with the Treasury set to announce the sizes of next week's two- and five-year note auctions on Wednesday. Those will be the first coupon sales to hit the market in a month.
Treasury prices continued to improve Friday as the better-than-expected consumer price report enabled the market to continue the rally that began on Thursday.
By late in the day, the 30-year bond was up 5/8 point to yield 8.45%. That is a sharp improvement from the 8.62% yield seen briefly on the long bond after Thursday's discouraging producer price report.
Traders reported small but steady amounts of buying Friday.
The good news in the May consumer price report was the core rate, excluding food and energy prices, which rose only 0.2% when economists had predicted a 0.3% rise.
The index as a whole rose 0.3%, in line with expectations. The biggest
Treasury Market Yields
Friday Week Month
3-Month Bill 5.74 5.72 5.56
6-Month Bill 6.03 5.98 5.81
1-Year Bill 6.33 6.36 6.13
2-Year Note 6.95 6.97 6.80
3-Year Note 7.36 7.40 7.11
4-Year Note 7.54 7.55 7.33
5-Year Note 7.91 7.94 7.73
7-Year Note 8.13 8.15 7.93
10-Year Note 8.26 8.27 8.06
20-Year Bond 8.45 8.48 8.28
30-Year Bond 8.45 8.46 8.26
Source: Centor, Fitzgerald/Telerate
gain came in energy prices, which jumped 1.4%, while food prices were unchanged.
"The encouraging news on consumer prices takes a little of the sting out of yesterday's producer price index," said Stepehn Gallagher, an economist at Kidder, Peabody & Co. The May producer price report rose 0.6%, with 0.4% gain in the core rate.
Also in Friday, the Federal Reserve reported that May Industrial production rose 0.5%, while capacity utilization rose 0.2% to 78.7%. And April's gain in industrial output was revised up to 0.3% from the 0.1% reported last month.
With the revisions in place, capacity utilization in April posted its first gain since last August. Mr. Gallagher said that turnaround suggests inflation improvement may be more difficult to achieve down the road.
As of May, year-over-year inflation was rising at a 5% rate. He expects inflation to improve to a 4% to 4 1/2% level, "but we'll get stalled there, because we're already seeing the pickup in industrial activity."
Treasury prices made new highs late Friday afternoon as a few participants tried to cover shorts in the thinly traded market.
A drop in commodity prices and Federal Reserve Governor John LaWare's upbeat comments on inflation may have helped the market, traders said.
The Commodity Research Bureau index fell 1.47 points Friday, to close at 213.43.
And late in the afternoon, wire services reported that Mr. LaWare thought the the consumer price index data were "very encouraging."
The September bond future contract closed 1/2 point higher at 93.
In the cash market, the 30-year 8 1/8% bond was 5/8 higher, at 96 10/32-96 14/32, to yield 8.45%.
The 8% 10-year note rose 13/32, to 98 4/32-98 8/32, to yield 8.26%.
The three-year 7% note was up 5/32, at 99-99 8/32, to yield 7.36%.
Rates on Treasury bills were mixed, with the three-month bill unchangled at 5.59%, the six-month bill three basis points lower at 5.78%, and the year bill off four basis points at 5.97%.