Treasury prices moved lower yesterday as traders focused mostly on the negative numbers in a mixed bag of economic news.
Late in the afternoon, the 30-year bond was 1/2 point lower and yielded 7.54%, while note prices were down 1/8 to 3/8 point.
The economic indicators that should have been friendly for the bond market were a 3l,000 jump in new claims for unemployment benefits and a 1.1% decline in October housing starts.
"The market ground lower for most of the day, mostly on technical trading," said Ellas Bikhazi, a money market economist at Deutsche Bank Government Securities.
Bikhazi said yesterday's statistics had little impact because they did not change the market's basic view that the economy is growing enough to preclude additional Fed easing, while inflation remains low.
Given that view, "we're at levels of interest rates that should be sustained for the foreseeable future, although maybe the curve will continue to flatten," he said.
During the morning, the long end led the bond market lower. Traders said bond prices were under pressure because speculative investors were taking off yield curve-flattening trades by selling long-term securities and buying short-term paper to cover short positions.
Prices improved briefly on the claims and housing starts numbers, then headed lower again.
The 31,000 increase in new filings for unemployment insurance during the week of Nov. 7, to 386,000, followed a string of declines in the weekly claims data and contrasted with economists' expectation that claims would rise only 3,000.
Kevin Flanagan, an economist at Dean Witter Reynolds Inc., said the increases in filings were widespread, suggesting the gain was not an aberration. He added that "construction was a common thread" among the states reporting gains, and said that might be related to the unexpected decline in October housing starts.
The Commerce Department reported October housing starts fell 1.1%, to a 1.229 million annual pace, while the September starts were revised down to a 1.243 million rate from the 1.256 million reported last month. Economists on average expected October starts to rise 1%, to a 1.27 million pace.
Most of the weakness was in multifamily starts, which dropped 14.1%. Single-family starts rose 0.7%.
"I think the figures just reinforce the point that although we have gotten evidence that we've avoided a triple dip, the economy is moving at a sluggish pace," Flanagan said.
He said the market's failure to hold its initial gains showed traders are still concerned about what the Clinton administration will do to stimulate the economy.
"If data come in weaker than expected the market gets nervous that it will press Clinton to come with an aggressive fiscal policy," Flanagan said.
Later in the morning, the entire market moved lower when the Philadelphia Fed reported its diffusion index of manufacturing activity had bounced back in November to 16.6, after coming in at a negative 4.7 in October.
The Philadelphia Fed's report said the businesses it surveyed reported "significant improvements" in current shipments and new orders, with 36% of the manufacturers reporting increases in orders, as opposed to 15% reporting declines.
Late in the afternoon, Treasury prices took a final hit when the Federal Reserve Bank of New York reported an unexpectedly large increase in the M2 measure of the money supply.
Bond traders have been unnerved by the recent resurgence in money growth, viewing it as another factor keeping Fed monetary policy steady. The market didn't like the $11.4 billion rise in M2 last week, and yesterday prices headed lower immediately on the news that M2 had jumped another $6.6 billion in the week ended Nov. 9.
A spokesman for the New York Fed also reported at the bank's weekly news briefing that the nation's M1 money supply rose $1.9 billion to $1 trillion in the week ended Nov. 9 and M3 increased $2.1 billion, to $4.2 trillion, in the same period.
The only news expected today is the release of the minutes from the Oct. 6 Federal Open Market Committee meeting. Traders said short-term prices may come under some pressure as dealers begin to prepare for next week's note sales. The Treasury will sell $15 billion of two-year notes Monday and $10.75 billion of five-year notes Tuesday.
The December bond futures contract closed 11/32 lower at 103 24/32.
In the cash market, the 75/8% 30-year bond was 17/32 lower, at 100 26/32-100 30/32, to yield 7.54%.
The 6 3/8% 10-year note fell 3/8, to 96 25/32-96 29/32, to yield 6.81%.
The three-year 5 1/8% note was down 1/4, at 99 27/32-99 29/32, to yield 5.15%.
In when-issued trading, the two-year note was yielding 4.69%, up from 4.60% late Wednesday, and the five-year note was offered at 6.07%, after being bid at 6.01% late Wednesday.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 3.17%, the six-month bill up three basis points at 3.38%, and the year bill eight basis points higher at 3.61%.
In other news, the New York Fed reported the federal funds rate averaged 2.97% for the week ended Wednesday, down from 3.07% the previous week.
Treasury Market Yields
Thursday Week Month
3-Month Bill 3.21 3.11 2.98
6-Month Bill 3.46 3.36 3.25
1-Year Bill 3.74 3.54 3.47
2-Year Note 4.60 4.41 4.23
3-Year Note 5.15 5.00 4.77
5-Year Note 6.02 5.88 5.79
7-Year Note 6.44 6.34 6.33
10-Year Note 6.81 6.77 6.75
30-Year Bond 7.54 7.59 7.61
Source: Cantor, Fitzgerald/Telerate