Treasury prices ended narrowly mixed Friday after the September employment report showed the economy continued to expand at a snail's pace last month.
Late in the afternoon, the 30-year bond was off 1/8 point and yielded 7.33%, while short-term notes were slightly higher on the day.
Initially, the Treasury market sold off violently on the news that September nonfarm payrolls had declined 57,000.
That decline compared unfavorably with the catastrophe traders had begun pricing in on Thursday, when the September purchasing managers' index and the weekly claims data both showed discouraging weakness. Some economists had revised their forecasts to show declines of more than 200,000 jobs.
But a lot of the disparity between those forecasts and the actual number reflected the fact that fewer federally funded summer jobs were lost than expected. Excluding those summer jobs, September payrolls rose 40,000, in the with the consensus forecast.
Analysts said that even though the market was initially disappointed in the report, the employment data were notably weak.
"The reports that came out earlier this week were dismal, and people were expecting much worse" news from the employment report, said Martin Mauro, a senior economist at Merrill Lynch Capital Markets. "This is only in line with expectations, but it's very grim."
Analysts said the employment report contained many discouraging details, including a downward revision to August payrolls and declined in hours worked, overtime hours, and hourly earnings.
August payrolls now show a 128,000 drop, down from the 83,000 decrease reported originally.
Mr. Mauro pointed to the declines in cyclical industries, including the 21,000 drop in construction jobs and the 26,000 decrease in manufacturing employment.
The jobs report "tells us the economy pulled back in September, it says bad things about the consumer's ability to spend and about production, and it's got to worry the Fed," he said.
President Bush cited the decline in the unemployment rate to 7.5%, from 7.6% in August, as good news. Most economists had forecast an increase in the unemployment rate and were surprised by the decline but they said the decline occurred because the size of the labor force was falling faster than the number of people with jobs.
The household survey from which the unemployment rate is derived showed 36,000 jobs were lost last month, while 250,000 left the work force.
Treasury prices retraced a large part of their earlier losses over the course of the morning as traders overcame their initial disappointment with the data and focused instead on the persistent weakness in the economy and the possibility for a Fed easing.
Most economists said the report was still weak enough to result in the Federal Reserve rate cut the bond market has been waiting for.
They expect a 50-basis-point cut in the discount rate, to 2 1/2%, and a 25-basis-point cut in the funds rate, to 2 3/4%.
When the Fed failed to signal an easing Friday, traders held on to their hopes of a rate cut and decided the Fed would wait to act until after Tuesday's Federal Open Market Committee meeting.
Peter Mayers, an assistant treasurer at Bank Julius Baer, said the sharp sell-off right after the employment report occurred as "weak longs" liquidated their positions.
"After that first move down, what brought us up was all new buying," Mr. Mayers said. "People were buying on a fundamental basis that nothing's really changed."
He said short-term prices could move higher, but the long end is likely to lag the rest of the market because of the uncertainty about the presidential elections, which was only heightened by Ross Perot's rejoining the race last week.
The long and short ends are "trading like two different markets," Mr. Mayers said.
There was not much reaction to the August factory orders report released later on Friday, even though the indicator was much weaker than expected.
The consensus forecast was for a small decline, in line with the August durable goods report. Instead factory orders dropped 1.9%, dragged down by a 3.8% plunge in the nondurables category.
Traders said the heavy issuance in the corporate market Friday did not seem to have any effect on Treasury prices.
Nor did the slide in stock prices have any impact, although short-term traders were keeping close watch on the Dow's decline late Friday afternoon. "If that keeps up [this] week, we'll feel it," a short-term trader said.
Analysts said the anticipation of an easing move and the lack of any important economic news should buoy Treasury prices early this week.
The market's good mood will be tested on Wednesday, though, when dealers must bid on $9.75 billion of seven-year notes. The seven-year is an awkward maturity because retail investors are not that interested in it. Traders said the fact that the auction falls on the Jewish holiday Yom Kippur also could create problems.
And traders said as the month of October wears on, the presidential election is likely to weigh more and more heavily on the market.
The December bond futures contract closed 13/32 lower at 105 27/32.
In the cash market, the 7 1/4% 30-year bond was 1/8 lower, at 98 29/32-99 1/32, to yield 7.32%.
The 6 3/8% 10-year note was unchanged, at 100 28/32-101, to yield 6.23%.
The three-year 4 5/8 note was up 2/32, at 101 10/32-101 12/32, to yield 4.10%.
In when-issued trading the seven-year note to be sold Wednesday was bid at 5.81%.
Rates on Treasury bills were higher, with the three-month bill three basis points higher at 2.63%, the six-month bill up four basis points at 2.79%, and the year bill two basis points higher at 2.88%.
Treasury Market Yields
Friday Week Month
3-Month Bill 2.66 2.84 2.96
6-Month Bill 2.84 2.90 3.03
1-Year Bill 2.96 3.03 3.16
2-Year Note 3.67 3.78 3.985
3-Year Note 4.10 4.23 4.32
5-Year Note 5.19 5.33 5.28
7-Year Note 5.77 5.91 5.85
10-Year Note 6.23 6.40 6.38
30-Year Note 7.32 7.35 7.28
Source: Cantor, Fitzgeral/Telerate