Overseas selling, a faltering dollar, and the failure of Treasuries to parlay Friday's bond-friendly jobs news into gains pushed prices lower yesterday.
"I think it's really spillover, actually, from Friday's debacle," Christopher S. Rupkey, a vice president and financial economist at Mitsubishi Bank, said yesterday. "We had good news on Frlday, and we didn't go up or at least we didn't hold on to the gains." The government's long bond shot higher early Friday after the Labor Department reported a lowerthan-expected 179,000 increase in August nonfarm jobs. The benchmark bond ended the day half a point lower, however, chilled by inflation news.
Yesterday, the 30-year bond ended down 19/32 to yield 7.53%.
Rupkey said the dollar's drop against the German mark helped add to the Treasury market's early losses yesterday. The economist said yesterday's lows were reached at about 2:30 p.m., Eastern daylight time, when the Johnson Redbook retail sales survey for the week ended Sept. 3 showed a 4.4% month-todate increase over August.
The market then got a technical bounce near the end of futures trading, and reclaimed some of those losses. Rupkey added that post-Labor Day sentiment and the Rosh Hashanah observance made for a quiet session.
"Activity is next to nothing," he said. Given the lack of retail trading activity, Rupkey found yesterday's sharp drop surprising, he said.
"I'm surprised we're down as far as we are," Rupkey said.
John Canavan, an analyst at Stone & McCarthy Research Associates who was interviewed before the release of the Johnson Redbook survey, said he saw "no strong catalyst" behind yesterday's descent, but cited a combination of weaker markets for Treasuries overseas, the weak dollar and follow-through from Friday's losses.
"Traders were just unable to find any kind of upside," Canavan said. "It just becomes a case of 'if you can't take it higher, take it lower.'"
A government trader observed. "People are afraid of the [producer price index] number coming up as well."
Margaret D. Patel. portfolio manager of the $165 million Advest Advantage Government Securities Fund, cited continued fear of impending inflation as also helping to drag prices lower.
"I think rates are going to continue to drift higher," she said.
Not only is the U.S. economy strengthening, but the economies of Europe, Japan, and developing countries are also gathering steam, Patel said. Economic strengthening abroad should translate into more demand for U.S. exports, which should "offset any weakening in domestic demand," she said.
Patel sees another hike in short-term interest rates on the horizon, and said the only question that remains is whether the Federal Resetwe can hold off until after the November elections.
Turning to high-grade corporate securities, spreads were unchanged, a trader said yesterday.
"It's a dead day," he said. High-yield securities were a touch softer yesterday as the recent Labor Day weekend and Rosh Hashanah thinned ranks, according to Kingman Penniman, head of high-yield research at Duff & Phelps.
"There's not a lot of activity," Penniman said. "There's no new-issue calendar."
On a more specific note, Kaiser Aluminum bonds fared worse than the overall market. losing 1/2 to a full point on troubles in Ghana.