After trading in very narrow ranges for almost two weeks, Treasury prices managed a decent rally Friday on a host of positive factors, including a weaker-than-expected Chicago purchasing managers' report and signs of shakiness in other markets.
Late in the afternoon, the 30-year bond was up 3/4 point to yield 8.40%, after having closed somewhere between 8.46% and 8.51% for the previous nine sessions.
"The market was in an overall good mood," said Anthony Karydakis, a senior financial economist at the First National Bank of Chicago.
Prices began to rise overnight in London as the unrest in Yugoslavia and a German court decision that might lead to a withholding tax on interest income made Treasuries look like a safe haven for investors.
The market got another big boost early in the New York session when the Chicago purchasing managers' June index fell to 47.6% on a seasonally adjusted basis, from the 49.2% reading in May.
The number, one of the few weak statistics the market had gotten recently, caused some economists to revise downward their estimates for today's national purchasing managers' June report.
But Evelina Tainer, senior domestic economist at First Chicago, said the June losses might just be a small correction after the index's big May gains.
It may be more accurate to look at the report's movement over the last two months, she said, and at 47.6%, the Chicago index is well above the 40.9% April reading.
So even though the Chicago report fell slightly, "I think it's still consistent with an increase in the national index to 47%" from the 45.4% May reading, Ms. Tainer said.
Both stock and commodity prices fell sharply Friday morning, adding to the Treasury market's gains.
The Dow Jones industrial average was off more than 50 points during the day, although it closed only 28.18 points lower, at 2,906.75, and that weakness reportedly caused some institutional money managers to move funds from stocks into bonds.
There was a rumor that one account had bought $1 billion of three-year notes with money that had been in equities.
And during the session, the Commodity Research Bureau's price index touched its lowest levels in four years.
The index's plunge reflected declines in the prices of corn, wheat, and soybeans after the Department of Agriculture announced optimistic crop forecasts late Thursday. The declines in commodity prices added to participants' optimism about inflation.
Speculation about the travails of money center banks kept things hopping at the short end, although all the tumors were denied.
In the morning, Chase Manhattan denied rumors that it was having trouble getting short-term funding. And in the afternoon, Olympia & York Developments Ltd., a major Canadian real estate developer, denied speculation it was close to bankruptcy and might take a U.S. money center bank with it.
Traders at various primary dealers had different accounts of how much retail had been involved today. One note trader referred to the report of a $1 billion buyer of notes and said it may have been a case of a few big purchasers, rather than lots of smaller ones.
A bond salesman questioned whether the Treasury market could hold today's gains.
"You've got people who are all gunned up at basically the recent highs," he said.
Weak data next week could allow the market to move higher, but if the market gets more statistics showing the economy is slowly improving, as seems likely, Friday's buyers will be disappointed and Treasury prices could fall abruptly, the salesman said.
The key number this week is Friday's June employment report.
Late last week, economists' forecasts for June payrolls varied widely, ranging from a 100,000 decrease to a 90,000 increase.
On average, the forecasts suggested there would be no change in nonfarm payrolls in June. But analysts argued that the bond market could probably swallow another gain in payrolls as long as the increase did not greatly exceed the 59,000 jobs gained in May.
"No one will be surprised if the number Friday indicates a moderate recovery is underway," Mr. Karydakis said. "I think people can adjust to another 50,000 or 60,000 increase like the one we got last month."
The back-up in rates in the wake of the May jobs report "has created a cushion that allows the market of the current yields level to digest moderately strong economic numbers," he added.
Michael Moran, chief economist at Daiwa Securities America, is expecting a rise of 60,000 jobs and said the market would find that number "reassuring" since it suggests only an anemic recovery.
Such a gain would show the market that "although the recovery is beginning, it's not going to run away," Mr. Moran said.
The September bond future contract closed 11/16 higher at 93 20/32.
In the cash market, the 30-year 8 1/8% bond was 25/32 higher, at 96 25/32-96 29/32, to yield 8.40%.
The 8% 10-year note rose 15/32, to 98 12/32-98 16/32, to yield 8.22%.
The three-year 7% note was up 7/32, at 99 8/32-99 10/32, to yield 7.26%.
In when-issued trading, the 7% two-year note was 1/8 higher, at 100 5/32-100 6/32, to yield 6.89%, down from the 7.06% average at last Tuesday's auction, and the five-year 7 7/8% note was up 9/32, at 99 30/32-100, to yield 7.87%.
Rates on Treasury bills were mixed, with the three-month bill steady at 5.55%, the six-month bill five basis points lower at 5.68%, and the year bill six basis points lower at 5.94%.