Treasury security prices were mixed yesterday at the end of a quilet, choppy session spent waiting for today's November employment report.
The long bond got a late boost from wire reports that Treasury Secretary Nicholas Brady said the government was considering shifting some long-term issuance to the short end, and the 30-year bond ended 1/4 point higher where it yielded 7.82%.
Other Treasury prices closed slightly lower, having given back earlier gains in an afternoon bout of profit-taking.
As long-term prices lagged the rest of the market in recent weeks, and long-term yields remained stubbornly high, some economists suggested the government should reduce long-term debt issuance. They argued that would lower longterm yields and stimulate economic activity.
When reports of Mr. Brady's remarks came across the wires late yesterday, "it scared everybody," said Jay Goldinger, a principal at Capital Insight in Los Angeles.
Participants who had short positions at the long end scrambled to buy securities to cover those shorts, Mr. Goldinger said, and that effort sent the 30-year up more than 1/2 point from its lows. "If people were not short the long end, there wouldn't be this reaction," he said.
Until that late-day scare, traders said activity had been subdued. A note trader summed it up up as "profit-taking, settling up and position-squaring ahead of tomorrow's numbers."
"The employment data are by far the most important economic report that we get each month," said Charles Lieberman, director of financial markets research at Manufacturers Hanover. "Most people who want to have positions or don't want to have positions typically implement those decisions well ahead of the day before the report."
Until yesterday's partial setback, prices had moved slowly but steadily higher all week in anticipation of feeble job statistics.
The consensus forecast is for a 40,000 decline in November nonfarm payrolls. Economists also expect a downward revision to October, which was reported last month as a 1,000-job decrease.
Meanwhile, the majority of economists expect the unemployment rate to rise 0.1-point, to 6.9%, and a substantial minority are calling for a 0.2-point increase, to 7.0%.
Traders and analysts think such a report would result in another easing by the Federal Reserve.
Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp., expects the Fedto lower the funds rate 25 basis points, to 4.5%, if the decline in payrolls is in line with the consensus forecast.
But some economists think there is a possibility the Fed would do even more.
"My suspicion is the Fed is becoming very nervous and if we get a weak employment report, there's a good chance they'll move aggressively," said Robert Chandross, chief economist at Lloyds Bank.
Mr. Chandross said the Fed would move aggressively by cutting the discount rate half a point, to 4%, and cutting funds either 25 or 50 basis points.
Traders said yesterday that even if the employment report is weak and the Fed eases, the approach of yearend means the market is vulnerable to profit-taking.
Treasury Market Yields
Thursday Week Month
3-Month Bill 4.44 4.49 4.74
6-Month Bill 6.51 4.59 4.86
1-Year Bill 4.59 4.71 4.92
2-Year Note 5.23 5.41 5.59
3-Year Note 5.59 5.77 5.95
4-Year Note 5.70 5.87 6.03
5-Year Note 6.30 6.52 6.62
7-Year Note 6.74 6.99 7.06
10-Year Note 7.19 7.40 7.40
15-Year Bond 7.52 7.74 7.73
30-Year Bond 7.82 7.96 7.91
Source: Cantor, Fitzgerald/Telerate
"You may run into a better sell-off," the note trader said. "Anything can happen in December.
"Yearend is approaching and there are profits to protect," a bond trader said.
The big increase in weekly jobless claims yesterday seemed to support the market's expectations for a dismal November employment report.
The Labor Department said new claims for unemployment insurance rose 57,000 to 471,000 in the week of Nov. 23. The consensus forecast was for an increase of only about 30,000.
And in the week ended Nov. 16, the number of people receiving state benefits rose 96,000, to 3.485 million.
But traders didn't pay much attention to claims, or to any of yesterday's news, for the matter.
"I think people are just jockeying ahead of tomorrow's number," a government bond trader said.
Other economic news included a 1.9% gain in October factory orders, which was a little stronger than expected, and a set of November chain store sales reports that Mr. Lieberman termed "uninspired."
Also yesterday morning, the Bundesbank said it was not planning to change German interest rates. Many participants had expected the bank to announce increases in key German rates, but there was little market reaction to the Bundesbank's announcement.
A government coupon trader said declines in oil and other commodity prices were good news, but the remarks by various administration officials about the economy had tended to make the market nervous.
Even though the officials periodically threw in remarks about the importance of preserving fiscal discipline, "you can't trust them at all," the trader said. "Just to have them talking about it is unsettling."
And late in the day, the market was surprised by the Treasury's announcement that during November, $3.2 billion of securities were stripped, since all the tank of Japanese investors dumping Strips had people expecting a report showing net reconstitution.
On the other hand, the rise in the monetary aggregates was expected.
A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefling that the nation's MI money supply rose $1.5 billion to $890.3 billion in the week ended Nov. 25; the broader M2 aggregate gained $2.1 billion, to $3.4 trillion; and M3 gained $4.1 billion, to $4.2 trillion, in the same period.
Also, for the week ending Wednesday, the federal funds rate averaged 4.79, up from 4.68% the previous week, according to the New York Fed.
The March bond future contract closed 9/32 lower at 99 29/32.
In the bond cash market, the 30-year 8% bond was 7/32 higher, at 101 27/32-101 31/32, to yield 7.82%
The 7 1/2% 10-year note fell 3/32, to 102-102 4/32, to yield 7.19%.
The three-year 6% note was off 1/16, at 101 1/32-101 3/32, to yield 5.59%.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 4.34%, the six-month bill up five basis points at 4.36%, and the year bill two basis points higher at 4.39%.