Some stronger-than-expected economic reports caused a hasty retreat in the Treasury market during Friday's shortened trading session.
The 30-year bond closed 5/8 point lower to yield 8.05%.
The Public Securities Association recommended the government market close early Friday ahead of the holiday weekend.
Prices began to erode in overseas trading as dealers took profits from the week's run-up, then fell further when U.S. participants liquidated after seeing Friday's unfriendly indicators, especially the jump in the Chicago purchasing managers index.
The Chicago index rose to 56.6% in August from 50.7% in July on a seasonally adjusted basis, when most economists had expected a reading between 51% and 52%.
The strength in the Chicago report suggests the national number today may be stronger than expected. Economists had expected the national index to rise to 52.5% in August from the 51.8% July reading.
The market was less worried about the 1.2% rise in July leading indicators and the 6.2% increase in July factors orders, both of which owed much of their strength to the July durable goods report.
Matthew Alexy, a money market economist at Deutsche Bank Government
Treasury Market Yields
Friday Week Month
3-Month Bill 5.49 5.52 5.62
6-Month Bill 5.48 5.68 5.79
1-Year Bill 5.71 5.80 6.02
2-Year Note 6.34 6.40 6.67
3-Year Note 6.64 6.76 6.96
4-Year Note 6.79 6.86 7.11
5-Year Note 7.31 7.36 7.61
7-Year Note 7.64 7.68 7.88
10-Year Note 7.80 7.86 8.04
20-Year Bond 7.99 7.06 8.23
30-Year Bond 8.05 8.12 8.24
Source: Cantor, Fitzgerald/Telerate
Securities, said a full point of the 1.2% gain the leading indicators was due to the strength in durables. "It's just sort of recycled data, it really shouldn't surprise anybody."
The selling Friday was mostly done by dealers and speculative accounts, a government note trader said.
"You shook out a lot of day traders," he said. "The holding investing public didn't sell and they're not going to sell until they see the employment report."
All eyes this week will be on Friday's August employment data, especially after the contradictory signals the market has gotten from indicators over the past few weeks.
The 10.7% surge in July durable goods orders was followed by the downward revision to second-quarter gross national product and the 8.5% plunge in July home sales. The market hit its highs after the home sales report, only to trade off on Friday's Chicago purchasing managers report.
Economists said one possible explanation for the sharp contrast between weak and strong statistics is that although the manufacturing sector has begun to come back to life, the service sector is lagging.
Since the service sector is by far the largest part of the economy nowadays, they say it may be inaccurate to place too much signficance on measures of the manufacturing sector such as the durable goods report.
Analysts will be watching the breakdown of nonfarm payrolls on breakdown of nonfarm payrolls on Friday to see how the manufacturing and service sectors fare.
Another key aspect of the employment report will be components that affect personal income, including earnings statistics and the number of hours worked.
Economists are troubled by signs of weak consumer spending, including the downturn in July home sales and the recent drop-off in auto sales. Some analysts trace the lackluster demand for these big-ticket it ms back to the listless labor market.
"I think households are still a little bit nervous," said Paul Kasriel, a monetary economist at Northern Trust Co. "The day doesn't go by when you don't see some major layoff off taking place somewhere."
The range of forecasts for August payrolls ranges from flat to up to 50,000. Economists said even a 50,000 increase would probably not deter the Fed from easing.
"I think they have an inclination to ease, because the market seems to be beckonong," said William Griggs, a managing director of Griggs & Santow Inc. He added that the downward revision to second-quarter GNP had added to the political pressure on the Fed to ease.
The December bond futures contract, which is now the front month, closed at 97 8/32, down 11/16 on the day.
In the cash market, the 30-year 8 1/8% bond was 5/8 lower, at 100 21/32-100 25/32, to yield 8.05%.
The 7 7/8% 10-year note fell 3/8, to 100 11/32-100 15/32, to yield 7.80%.
The three-year 6 7/8% note was down 3/16, at 100 17/32-100 19/32, to yield 6/64%.
The when-issued 6 3/8 two-year note closed 1/8 lower, at 100 1/32-100 2/32 to yield 6/34%, which is still well below the 6.46% auction average. And the 7 1/4% five-year note was off 9/32 at 99 21/32 to yield 7.31%, down from the 7.37% auction average.
Rates on Treasury bills were higher, with the three-month bill up four basis points at 5.34%, the six-month bill up five basis points at 5.37%, and the year bill four basis points higher at 5.41%.
Another Dealer Exits
Continental Bank Corp. said Friday is resigned its primary dealership in U.S. government securities as part of a general restructuring of the bank.
Continental is the 12th firm to give up on dealing in Treasury securities over the last three years. Like many of the other firms that have withdrawn, it cited the difficulty of turning a profit in the highly competitive Treasury market.
"With the advances in technology and eroding profit margins, it is extraordinarily hard to make money," said S. Waite Rawls 3d, a vice chairman at the bank.
It is particularly hard to make money dealing with customers, Mr. Rawls said. Continental will continue to trade Treasuries for its own account.
He added that the bank's "core corporate customers do not demand the service," and said that was also the situation when Continental withdrew from the municipal bond market in 1987.
In its press release, Continental said "the improved prospects for favorable federal banking legislation" was another factor in the decision, since that made it less necessary to have the business flow from the government bond business to set up a securities subsidiary.
Of the 50 employees at the dealership, 30 to 40 will be let go, Mr. Rawls said.
Continental said Friday its restructuring would take several years and would result in a $175 million charge to its earnings and a sharp cut in dividends.
Continental has been a primary dealer since 1961, when it was a member of the first group of firms to be designated primary dealers by the Fed.
With its exit, there are 39 primary dealers remaining, down from a high of 46 in 1988.
At least one more departure is expected soon, since the merger of Chemical and Manufacturers Hanover will result in the elimination of one of the two dealerships.
Salomon Brothers' status as a primary dealer has come under attack since the revelations of its illegal biddings at Treasury auctions. And market participants said other dealers, especially smaller ones, may decide that the Treasury bond business is just not worth losing money over.