The Treasury 30-year bond posted its lowest closing yield of the year Friday, and analysts said the market should be able to improve more in the weeks ahead.
over the course of last week, the price of the long bond rose 1 3/8 points. The 30-year closed Friday at a 6.70% yield, besting its previous low close of 6.72% on April 19.
No one is expecting the bond market to repeat the amazing rally it enjoyed during the first quarter, but analysts said a number of factors suggest that Treasury prices can move higher over the near term.
"I can think of three reasons for this market to continue to go up: customers, the fundamental data, and the supply outlook," said Ward McCarthy, a managing director at Stone & McCarthy Research Associates in Princeton, N.J.
McCarthy said money managers have finally come out of their shells, after trading very cautiously in the past two months.
His firm's survey shows portfolio managers have been spending their cash and extending the duration of their holdings, "and the survey suggested there is more of this to come," McCarthy said. "Money managers are expecting to be active in the market."
The upcoming economic news should give the bond market more reasons to be bullish, analysts said.
The key numbers this week, the Purchasing Managers' Index and employment report for June, will give the market its best look so far at how the economy fared this month.
Martin Mauro, a senior economist at Merrill Lynch & Co., expects both reports to weaken from their May readings, and he said that will add to the arguments against any near-term tightening by the Federal Reserve.
Mauro predicted that 150,000 jobs will be added to June nonfarm payrolls, down from the 209,000 increase in May, and said the June purchasing managers' index will fall to 50.5% from the 51.5% reading in May.
Some economists are expecting the June employment report to be even more favorable for the bond market.
Edward Hyman of ISI Group is calling for a 25,000 decrease in June jobs, and economists at Goldman Sachs are forecasting a scant 25,000 increase. Hyman cites recent statistics, including the decline in the Philadelphia Fed's June index of manufacturing hours and the rise in unemployment claims.
Participants are also anticipating another month's worth of good inflation news. The June price indexes will be released in the middle of the month. McCarthy said he expects the June producer price index to decline, while the core rate, excluding food and energy costs, will be flat.
Analysts said that even though the numbers look soft, the outlook is still for moderate economic growth, with second quarter output rising by 2.5% to 3%. McCarthy said the appearance of a number of weak statistics was partly coincidental and will give the bond market the impression the economy is weaker than it is.
The third element suggesting that Treasury prices will move higher is the fact that the government will not sell any more notes or bonds until the end of July.
The head of a trading desk said the Treasury market has benefited from that prospect. "The market's got a bid to it because of the lack of supply," he said.
Mauro of Merrill Lynch sounded a note of caution on the issue of supply, though.
Particularly in the short to intermediate sector, a lot depends on municipal defeasance," he said. "If that slows down in July due to the new fiscal year or regulatory changes, that would be the absence of a positive" for the Treasury market.
Mauro said anticipation of the August refunding and the Treasury's shift toward selling more short-term debt could also temper the market's optimism.
The long bond's intraday high for the year was the 6.64% yield posted on March 8, and McCarthy said he expects the bond to break below that level.
But Lynn Reaser, chief economist at First Interstate Bancorp. in Los Angeles, was less optimistic: "I think we've had a significant rally and I would not expect [the 30-year] to move much below 6.65% until we see the results of the deficit reduction package."
On Friday, prices ended higher after a quiet trading session, with the 30-year bond up 3/8 to yield 6.70%.
Traders reported buying in the intermediate area, including one especially large purchase of five-years. They said hedge funds, municipal issuers doing defeasance deals, and corporate dealers taking off hedges as they distributed more of last week's heavy issuance were all involved.
Talk of a weak June employment report and the possibility of a negative reading on the June producer price index helped the market's tone, traders said.
The market was less interested in the fact that the Senate passed tile budget deficit package. Traders expect a rough road ahead as the Senate and House try to reconcile the two versions of the legislation.
Friday's only indicator, May existing home sales, came in stronger than expected, but had little impact on the market. Sales of existing homes rose 4.6% in May, to a 3.61 million annual rate.
The September bond futures contract closed 1/2 higher at 113 16/32.
In the cash market, the 7 1/8% 30-year bond was 3/8 higher, at 105 12/32-105 14/32, to yield 6.70%.
The 6 1/4% 10-year note rose 9/32, to 103 5/32-103 7/32, to yield 5.80%.
The three-year 4 1/4% note was up 1/8, at 99 19/32-99 21/32, to yield 4.37%.
In when-issued trading, the 4 1/8% two-year note was 1/8 higher, at 100 2/32-100 3/32, to yield 4.07%, and the 5 1/8% five-year note was up 5/32, at 100 1/32-100 3/32, to yield 5.10%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.09%, the six-month bill off one basis point at 3.19%, and the year bill three basis points lower at 3.37%.