A raft of favorable economic news was not enough to keep the Treasury market afloat yesterday.

Prices rallied during the morning

on another good inflation report

and a couple of weaker-than-expected economic indicators, but by the end of the day, those early gains had disappeared.

The 30-year bond closed 1/8 point lower on the day, and 1/2 point below the session highs, to yield 7.50%.

"People are waiting for the next clue and they're a little puzzled as to what it's going to be, so we changed direction two or three times," said Elias Bikhazi an economist at Deutsche Bank Government Securities.

Bikhazi said trading was thin yesterday, with little involvement by retail investors, which made it easy for rumors and wire service headlines to push prices back and forth.

"Supply is also on many people's minds, and it's not clear how that will impact the market," he said. "Dealers are probably wondering how much demand there will be.

Traders said they were frustrated by the market's inexplicable ups and downs.

A note trader said that it seemed as if big curve trades and spread trades were being executed, but that he had not seen the trades himself.

There are some huge flows going on that only a few guys are seeing," the trader said. "It makes it hard to know what's going on."

A bond trader said the volatility reflected the collection of problems facing the Treasury market, including selling by dealers who are hedging positions in other markets, the uncertainty about Federal Reserve monetary policy, and the concern about the presidential election and specifically about last night's debate.

Yesterday's first pair of numbers, weekly jobless claims and September consumer prices, resulted in only a modest boost in Treasury prices because the good news about inflation was offset by a bigger-than-expected decline in claims.

The September consumer price index was better than expected, rising only 0.2% when the market expected a 0.3% increase. The core rate, excluding food and energy prices, also was up 0.2%.

But the weekly jobless claims data showed a 16,000 decrease in new filings, to 483,000, for the week of Oct. 3. The consensus forecast called for a 6,000 increase.

"The CPI reading continues to show inflation at both the retail and wholesale levels is moderate or maybe even improving," said Kevin Flanagan, an economist at Dean Witter Reynolds Inc.

That is favorable news for the bond market and especially for the long end, where investors have worried that a Clinton presidency would increase price pressures, Flanagan said.

Although the claims figure offset some of the market's enthusiasm about consumer prices, Flanagan said the decline was not as bad as it looked. In addition to the 383,000 people who filed for state benefits, 21,310 applied for federal benefits.

"If you combine the state and federal filings, claims are still around 400,000," he said. "While the labor force is not deteriorating, it's not improving, either."

The indicators released later yesterday morning were unambiguously friendly for the bond market.

The Federal Reserve Bank of Philadelphia's October diffusion index measuring business activity turned negative for the first time since February, falling to a negative 4.7 from 14.7 in September. And the big increase in August business inventories suggested further weakness in demand.

The Philadelphia Fed said its survey's shipments, new orders, and employment components all fell in October. The data "suggest that demand for manufactured products has weakened and that production has flattened," its report said.

Economists said the inventories report, which usually gets less attention from the market, was also troubling. August inventories rose 0.3%, which was below the consensus forecast for a 0.4% gain, but at the same time July's increase was revised up to 0.4% from the 0.1 % reported last month.

Reports on consumer confidence and retail sales have not showed any big increases, which suggests the buildup in inventories was unplanned and reflects weak demand, said Mark Green, an economist at Wells Fargo Bank.

The accumulation of inventories will add to third-quarter output, but "it may cause some manufacturers and retailers to cut back in the late third quarter and into the fourth quarter," Green said. "The implication is that fourth-quarter output and employment may be weaker."

The market also benefited yesterday morning from a headline in the Financial Times that claimed Fed Chairman Alan Greenspan had called the current downturn the worst recession since 1945. But Bikhazi said the Fed chairman only meant to say that the balance sheet adjustment that has taken place, with businesses and individuals working off their debt burdens, was the biggest since the 1940s.

The market began to weaken by late morning, and by early afternoon the long bond was in negative territory.

Late yesterday, prices drifted a little lower when M2 rose more than expected.

A spokesman for the Federal Reserve Bank of New York reported at the bank's weekly press briefing that the nation's M2 money supply rose $8 billion to $3.5 trillion in the week ended Oct. 5; the MI aggregate rose $8.6 billion to $1 trillion; and M3 plunged $17.5 billion, to $4.2 trillion, in the same period.

The December bond futures contract closed 2/32 higher at 104 2/32.

In the cash market, the 7 1/4% 30-year bond was 5/32 lower, at 96 28/32-97, to yield 7.50%.

The 6 3/8% 10-year note fell 7/32, to 98 28/32-99, to yield 6.51%.

The three-year 4 5/8% note was up 3/32, at 100 10/32-100 12/32, to yield 4.48%.

Rates on Treasury bills were mixed, with the three-month bill down two basis points at 2.92%, the six-month bill up two basis points at 3.04%, and the year bill two basis points higher at 3.15%.

In other news, the New York Fed reported the federal funds rate averaged 3.24% for the week ended Wednesday, down from 3.33% the previous week.

Treasury Market Yields

Prev. Prev.

Thursday Week Month

3-Month Bill 2.96 2.82 2.93

6-Month Bill 3.10 2.95 2.99

1-Year Bill 3.24 3.03 3.11

2-Year Note 3.99 3.80 3.81

3-Year Note 4.48 4.24 4.32

5-Year Note 5.51 5.34 5.37

7-Year Note 6.07 5.97 5.90

10-Year Note 6.51 6.38 6.38

30-Year Bond 7.50 7.44 7.32

Source: Cantor. Fitzgera/Telerate

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