After four sessions of lethargy, Treasury prices posted modest gains Friday as speculation grew that the Federal Reserve would ease rates again soon.
By late in the day, the 30-year bond was up 1/4 point to yield 7.88%.
The rally got its start after Friday's Wall Street Journal said money supply growth has been so weak that some Fed officials think it might be necessary to implement another 50 to 75 basis points worth of cuts in the funds rate.
The move might come within "the next several weeks," according to the Journal.
As prices burst higher in early New York trading, the December bond futures contract managing to break through a key resistance level at 99 10/32.
But after that initial surge, there was little sign of follow-up buying, and eventually participants began to take profits. There were reports of a large seller in the futures pit during the afternoon.
Treasury Market Yields
Friday Week Month
3-Month Bill 5.32 5.29 5.52
6-Month Bill 5.45 5.40 5.68
1-Year Bill 5.52 5.50 5.80
2-Year Note 6.14 6.15 6.40
3-Year Note 6.39 6.46 6.76
4-Year Note 6.59 6.62 6.86
5-Year Note 7.06 7.09 7.36
7-Year Note 7.36 7.43 7.68
10-Year Note 7.56 7.63 7.86
20-Year Bond 7.82 7.87 8.06
30-Year Bond 7.88 7.93 8.12
Source: Cantor, Fitzgerald/Telerate
Some traders said dealer short covering probably played a big part in the morning rally.
A note trader pointed out that intermediate and long-term paper outperformed short-term securities on the way up, even though the short end usually benefits most when the Fed eases. The trader said that indicated dealers were coming in to cover short positions they established by selling securities, mostly in the intermediate and long-term sectors, to investors earlier in the week.
Friday's tidbits of economic news had little effect on the Treasury market.
The market seemed to ignore the improvement in the latest 10-day sentiment figures from the University of Michigan. The Michigan survey found consumer confidence rose to 84.5 from 82.0 in early September, while expectations increased to 77.9 from 75.3.
Those numbers suggest that the Conference Board's September reading on consumer confidence, to be released tomorrow, will also show some improvement.
Later in the morning, the Philadelphia Fed survey showed manufacturing in that area was improving, but at a slower pace than in July.
Only 25% of the firms surveyed reported increases in business, down from 40% in August. But that still exceeds the number of firms reporting decreases, making it six months in a row that the Philadelphia Fed's diffusion index has come in positive.
Analysts said there is plenty of fundamental support for the market's bullish mood.
"Housing has flattened out, consumers just are not spending and every day you look at the paper and see another layoff here, another layoff there," said Ward McCarthy, a managing director of Stone & McCarthy Research Associates. "The prospects for the economy are still very weak and the prospects for the bond market remain favorable."
But the market may pause this week, or even backtrack a little, as dealers bid on supply and cope with quarter-end pressures.
"One reason to be cautious is that with quarter's end coming, dealers are going to have to reduce their positions," Mr. McCarthy said.
On the other hand, he said the market will have no problem absorbing this week's new supply, which include $13 billion of two-year notes to be sold tomorrow and $9.25 billion of five-years Wednesday.
William Sullivan, director of money market research at Dean Witter Reynolds, also expects the auctions to go well, since the hopes for another Fed easing make short-term paper more attractive.
Mr. Sullivan pointed out that since $18 billion of two- and four-year notes are maturing, the amount of new cash required is only about $4 billion. "This is not a major challenge for the market."
Most of this week's numbers are minor, but the consumer confidence report tomorrow and the durable goods number Wednesday will get some attention.
Durable goods, which posted a huge 11.2% gain July, is expected to show a rollback in August.
If August durables orders "hold their own or increase, that's the only thing that could hurt market sentiment in a significant way," Mr Sullivan said.
"The thing that makes me nervous is we have had a very good run and sentiment is very bullish," said Paul Kasriel, a monetary economist at Northern Trust Co. "All we need is one strong number, and we could have a problem."
The December bond future contract closed 5/16 higher at 99 4/32.
In the cash market, the 30-year 8 1/8% bond was 1/4 higher, at 102 19/32-102 23/32, to yield 7.88%.
The 7 7/8% 10-year note rose 1/4, to 102-102 4/32, to yield 7.56%.
The three-year 6 7/8% note was up 1/16, at 101 6/32-101 8/32, to yield 6.39%.
In the when-issued market, the two-year note was bid at 6.16% and the five-year stood at 7.08%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 5.19%, the six-month bill off one basis point at 5.24%, and the year bill two basis points lower at 5.24%.
More Bad Bids by Salomon
Salomon Brothers said Friday that after getting additional data from the government, it had uncovered two more instances in which the firm submitted unauthorized bids for clients at Treasury auctions.
The two additional instances did not cause the firm to exceed the 35% bid limit at the auctions and did not involve any employees besides the ones "already implicated in misconduct," Salomon said.
The firm said it is "likely that still other instances of similar behavior will be uncovered in the future."
Salomon said government regulators had asked it not to provide further details about the unauthorized bids for fear of jeopardizing investigations that are under way, and a Salomon spokesman said he could not comment on a report in Friday's New York Times that one of the bids involved S.G. Warburg Group PLC, the firm whose name Salomon already admitted to using illegally at the February five-year note sale.