With the state of the U.S. economy and the near-term direction of interest rates up in the air, portfolio managers say they are avoiding making new bets on the Treasury market.
Players on the buy side of the market agree that long-term yields are stuck at current levels until investors get a better fix on economic and inflationary fundamentals.
Against that backdrop, trading activity is on hold ahead of tomorrow's employment figures and next week's inflation reports. Money managers say the reports will provide the market with its first comprehensive view of the economy's performance in September and give trading some much-needed direction.
"The market is in a range and we'll see what happens with the data," said Jay Goldinger, chief investment officer at Capital Insight Inc. in Los Angeles.
The 30-year Treasury bond ended unchanged yesterday to yield 6% as no fresh news arose to inspire trading. All other coupons on the yield curve ended slightly higher as players stayed out of the market ahead of the release of the employment figures.
Estimates for nonfarm jobs run the gamut, with some economists predicting that fewer than 100,000 slots were created in September, while others are forecasting an increase of more than 200,000.
Market participants generally expect the figures to show that the economy is expanding, but not fast enough to create jobs or boost inflation. However, with estimates for the report sharply mixed, few investors are willing to place huge bets on the market.
"People are still heavy on cash and they'd like to invest that money in Treasuries," Goldinger said, making note of his belief that retail accounts have a sizable amount of cash to invest in fixed-income instruments, but that many are keeping funds close to the vest until the market finds direction.
Aside from what upcoming indicators say about the state of the economy, some money managers are not convinced that the market will be able to plot the next move just yet. Part of the problem is confusion over the recent dynamic of the Treasury market, where prices rose despite strong news on the economy, and at times, fell in weak news.
"Even if I knew right now what this Friday's employment figures or next week's inflation numbers would show, I am not sure I would have a clear idea of how to structure my portfolio," said James Somers, president of Somers Asset Management Inc. in Radnor, Pa.
Somers said many portfolio managers have taken a more defensive stance in recent sessions until a clear path for trading can form. He said many are structuring their portfolios in a "barbell" configuration, in which investors purchase securities at the short and long ends of the yield curve and avoid the intermediate sector.
The middle of the yield curve is believed by many market participants to be stuck at current levels because yields ion the middle have moved into expensive territory and will not attract buyers until rates move higher. Because intermediate Treasuries have become less attractive to retail accounts, market participants agreed that many primary dealers are having trouble distributing them.
"Intermediate securities haven't yet found their way into the hand of end investors and will not until rates move higher," Somers said.
Somers believes the long end is currently the most attractive sector of the yield curve because it offers investors the greatest potential for capital appreciation.
He said the chances for capital gain at the short and intermediate sectors of the curve have been hampered by the Treasury Department's announcement that it was hiking the volume of its weekly bill auctions and that upcoming two-year and five-year note offerings will probably see increases to meet the government's fourth-quarter borrowing requirement.
A steady Federal Reserve policy and the likelihood that monetary policy will remain on hold through the end of the year have also sapped some strength from the shorter maturities, said Donald Fine, chief market analyst at Chase Securities.
The Treasury market paid little attention to statements by central bank officials yesterday. News organizations reported Jerry Jordan, president of the Federal Reserve Bank of Cleveland, as suggesting that one possible method of restoring consumer confidence in the U.S. economy would be for Congress to mandate price stability within the next five years.
Speaking in Des Moines, Iowa, Jordan said such legislation would indicate to Americans that the government is serious about inching inflation toward zero percent.
Jordan agreed, however, that a bill to ensure lower inflation is unlikely to see passage.
In a prepared statement delivered in Chicago, Federal Reserve Chairman Alan Greenspan spoke of the importance of sophisticated financial institutions in the West to facilitate the production and distribution of goods and services in the former Soviet Union and other Eastern European nations. He did not speak about monetary policy.
Consumer Confidence Falls
The Money Magazine/ABC News poll of consumer confidence showed that overall confidence retreated to its dreary summer-long average this week as Americans' faith in their own finances fell to a 10-week low. The Consumer Comfort Index fell three points to minus 39.
In futures, the September contract ended up 2/32 to 119.09.
In the cash markets, the 3 7/8% two-year note was quoted late yesterday Up 1/32 at 100.02-100.03 to yield 3.82%. The 4 3/4% five-year note ended Up 2/32 at 100.07-100.09 to yield 4.68%. The 5 3/4% 10-year note was up 3/32 at 103.06-103. 10 to yield 5.31%. And the 6 1/4% 30-year bond was unchanged at 103.09-103.13 to yield 6.00%.
The three-month Treasury bill was down three basis points at 2.98%, the six-month bill was down three basis points at 3.10%, and the year bill was also down three basis points at 3.22%.Treasury Market Yields Prev. Prev. Wednesday Week Month 3-Month Bill 2.98 2.97 3.006-Month Bill 3.10 3.13 3.131-Year Bill 3.22 3.33 3.282-Year Note 3.82 3.84 3.753-Year Note 4.09 4.15 4.045-Year Note 4.68 4.75 4.617-Year Note 4.87 4.93 4.8210-Year Note 5.31 5.34 5.2230-Year Bond 6.00 5.99 5.86 Source: Cantor, Fitzgerald/Telerate