Most Treasury prices ended with small gains yesterday after a quiet session in which dealers adjusted their positions ahead of today's all-important October employment report.
Late in the afternoon, note prices were up as much as 1/8 point, while the 30-year bond was 1/8 point lower to yield 7.68%.-
The slight improvement in prices occurred even though the unexpectedly strong jobless claims figures released yesterday morning suggested some gains have occurred in the labor market.
Prices dipped initially when the claims report was released, but bounced back almost immediately. Traders said the market preferred to wait for the October employment statistics, which will give a more accurate account of the job,3 situation last month than the weekly claims data do.
They said most of the price gains occurred because participants decided to cover short positions ahead of tomorrow's October employment report.
"Dealers' positions have been whipped around a lot recently." said Astrid Adolfson, an economist at McCarthy, Crisanti & Maffei Inc. "A lot of them decided the best way to go into the numbers was flat, which meant some short-covering."
Some traders reported seeing buyers of intermediate securities. A note trader said buying in the mortgage-backed area had allowed mortgage dealers to take off hedges in the Treasury market.
Traders said an article in yesterday's New York Post that claimed the Bush administration prettied up the September jobs report may have helped Treasury prices a little.
The article, which cited "a reliable source," said the administration engineered the small improvement in the September unemployment rate by incorrectly classifying 226,000 people as discouraged workers, who are excluded from the labor force when the unemployment rate is calculated. The unemployment rate fell to 7.5% in September from 7.6% in August.
Labor Department officials denied the September report had been altered.
The Post article also suggested there may be 750,000 to 2 million fewer jobs than government statistics show and said the 2.7% rise in third-quarter gross domestic product was "universally looked upon with skepticism."
Adolfson said, "It supports what a lot of people feel, that the strong data were doctored." She added, "We don't think that was the case, but it gives people the hope that the economic numbers coming out [today] will be weak enough to keep open the hope for a Fed easing."
But the consensus forecast calls for a mediocre gain in October payrolls. Economists surveyed by The Bond Buyer on average expect a 20,000 gain in payrolls, and think jobs would have risen 56,000 if the departing teenage summer workers are filtered out.
Traders said yesterday that the market could improve sharply if the number is weaker than expected and might go a little higher if the number matches expectations.
But many think that any move to higher prices will bring in selling, because dealers will start to think about setting up for next week's Treasury auctions.
The Treasury will sell $60.6 billion of securities next week, starting with $23.6 billion of bills and $15.5 billion of three-year notes Monday, followed by $11.25 billion of 9 3/4-year notes Tuesday and $10.25 billion of 30-year bonds Thursday.
Late yesterday in when-issued trading, the three-year notes were bid at 5.01%, the 9 3/4-year notes were bid at 6.88%, and the 30-year bonds were yielding 7.66%.
The head of a Treasury trading desk predicted that by auction time, the three-years would be yielding about 5 1/4%, the 9 3/4-year notes would be closer to 7%, and the bonds would be trading around
Traders said the strength in yesterday's jobless claims report was unnerving.
The Labor Department said new claims for state unemployment benefits fell 16,000, to a seasonally adjusted 360,000, in the week ended Oct. 24. Economists had expected claims to rise slightly, to 380,000.
The number of people filing for federal benefits in the same week totaled an unadjusted 22,456, up slightly from the previous week. The number of people receiving state benefits in the week ended Oct. 17 increased 47,000, to 3.088 million.
It was the fifth decline in as many weeks and put claims at their lowest level in more than two years.
Economists said the steady decline in new filings suggests the labor market is doing better.
"Last week, I was talking about stabilization%' in the labor market, said Elias Bikhazi, an economist at Deutsche Bank Government Securities. "With this number, I'm inclined to say we're seeing a little improvement."
Bikhazi said the jobless claims have bee failing at the same time the market has gotten some other indicator "pointing to some kind of a better economic environment," like better credit and money supply numbers, and the increase in third-quarter output.
"I'm not saving we're poised for a tremendous boom, but I think it's got to be more and more sobering for anyone who thinks the Fed is going to move any time this year," he said. "The market is having a hard time going lower because we've come down so far so fast in the last few weeks, but I expect yields to move higher in the next few weeks." Traders said the market ignored yesterday's good news on productivity. The Labor Department said nonfarm productivity rose 2.6% in the third quarter, following a revised 1.7% increase in the second quarter.
Nor did the weekly money supply statistics have much impact on prices.
A spokesman for the Federal Reserve Bank of New York said at the bank's weekly press briefing that the nation's M1 money supply rose $3.9 billion to $1 trillion in the week ended Oct. 26; the broader M2 aggregate increased $1.1 billion to $3.5 trillion, and M3 lumped $6.4 billion, to $4.2 trillion, in the same period.
The December bond futures contract closed unchanged at 102 10/32.
In the cash market, the 7 1/4% 30-year bond was 6/32 lower, at 94 24/32-94 28/32, to yield 7.68%.
The 6 3/8% 10-year note fell 5/32, to 96 18/32-96 22/23 to yield 6.84%.
The three-year 4 5/8% note was up 3/32, at 99 13/32-99 15/32, to yield 4.82%.
Rates on Treasury bills were mixed, with the three-month bill unchanged at 3.01%. the six-month bill down two basis points at 3.20%, and the year bill two basis points lower at 3.37%.
In other news, the New York Fed reported the federal funds rate averaged 3.07% for the week ended Wednesday, up from 2.96% the previous week.
Treasury Market Yields
Thursday Week Month
3-Month Bill 3.05 2.98 2.82
6-Month Bill 3.27 3.25 2.95
1-Year Bill 3.48 3.46 3.03
2-Year Note 4.36 4.30 3.80
3-Year Note 4.82 4.73 4.24
5-Year Note 5.91 5.77 5.34
7-Year Note 6.41 6.24 5.97
10-Year Note 6.84 6.66 6.38
30-Year Bond 7.68 7.57 7.44
Source: Cantor, Fitzgerald/Telerate