Treasury prices posted modest gains Friday on a pair of favorable economic reports, with the 30-year bond closing 1/4 point higher to yield 8.43%.
The numbers seemed made to order for fixed-income traders. June's producer prices indicated inflation was under control and the June retail sales report showed consumers were restraining themselves at the mall, instead of rushing to the economy's rescue with their charge cards.
Traders and analysts decided that if price pressures were moderate and the economic recovery looked shaky, the Fed might have room to ease monetary policy again. The hopes for another easing were bolstered by the persistent weakness in the money supply.
Treasury Market Yields
Friday Week Month
3-Month Bill 5.72 5.73 5.74
6-Month Bill 5.92 5.95 6.03
1-Year Bill 6.23 6.39 6.33
2-Year Note 6.84 7.01 6.95
3-Year Note 7.29 7.41 7.36
4-Year Note 7.45 7.57 7.54
5-Year Note 7.89 7.99 7.91
7-Year Note 8.12 8.21 8.13
10-Year Note 8.24 8.32 8.26
20-Year Bond 8.43 8.46 8.45
30-Year Bond 8.43 8.48 8.45
Source: Cantor, Fitzgerald/Telerate
Considering the good news it got Friday, the Treasury market's gains were paltry. Traders said other factors put a lid on the market's rally, including the avalanche of supply due to hit in the coming month and worries that central banks will sell Treasuries to finance their intervention against the dollar.
Although the market gets a rest from coupon auctions this week, on Wednesday the Treasury will announce the sizes of next week's two-year and five-year note sales. And the quarterly refunding follows soon after that in early August.
The dollar took quite a beating Friday amid reports that 15 central banks, including the Federal Reserve, had sold dollars. By late in the day, the U.S. unit stood at 1.7880 German marks, down from 1.8340 late Thursday, and at 136.30 yen, down from 138.55.
The coordinated intervention left Treasury traders worried that the central banks would soon be in selling Treasury bills or short-term notes to pay for Friday's intervention against the dollar.
There were not reports of such selling Friday and some traders said the central banks may have accumulated war chests ahead of time.
Still, the prospect of such selling dampened the market's mood, especially since the dollar's sharp drop suggested the central banks had sold on a grand scale and would need to sell correspondingly large quantities of Treasuries.
Meanwhile, a bond futures trader said he was worried about what a weaker dollar could mean for the refunding. "If there's some concern about the dollar's trend, it could be bothersome to people considering dollar-denominated securities," he said.
The futures trader was also displeased by the turnaround in commodity prices. The Commodity Research Bureay index closed 2.34 points higher, at 208.26, led by rises in grains prices.
Other traders pointed out that a small rebound in the bureau index was not surprising, given its steady slide in recent weeks.
Retail investors were net buyers Friday and traders said market timers also contributed to the rally.
Treasury prices are likely to backtrack a little this week after arriving back at the high end of their recent price range Friday.
Kevin Logan, chief economist at Swiss Bank Corp., said Friday's numbers were favorable, but not so good that the bond market will be able to break out of its recent range, which he defined as 8.40% to 8.60% for the lond bond.
Instead, Treasury prices are likely to move back toward the middle of the range as the market gets some less friendly indicators this week, Mr. Logan said.
Today's 10-day car sales are expected to fall short of the 7.4 million annual rate seen in late June, which will be a plus for the bond market, but the June industrial production report is expected to post a moderate gain.
And Mr. Logan said Wednesday's consumer price report for June "may not be as well behaved as the PPI." Expectations of a rise in consumer prices could cause some profit-taking ahead of the number, he said.
Traders offered a couple of other reasons for the market to move lower.
"The numbers are still mixed, you're not getting any clear trend," a note trader said. "In the face of uncertainty, the path of least resistance is down."
That is especially true with supply on the horizon, he added.
And some of the thrill of tomorrow's semiannual Humphrey-Hawkins testimony dissipated last week when newspapers spilled the beans that the Fed governors voted to leave the money supply targets unchanged.
Still, traders will be listening for any hints Federal Reserve Chairman Alan Greenspan may drop on future monetary policy.
"One interesting point will be to see how much Greenspan focuses on money growth," said David Wyss, chief financial economist at DRI/McGraw Hill. "That's been very low lately and if he intends to ease, that's probably what he's going to talk about during the testimony."
The September bond future contract closed 15/32 higher, at 93 26/32.
In the cash market, the 30-year 8 1/8% bond was 9/32 higher, at 96 16/32-96 20/32, to yield 8.43%.
The 8% 10-year note rose 3/16, to 98 7/32-98/32, to yield 8.24%.
The three-year 7% note was up 3/32, at 99 6/32-99 8/32, to yield 7.29%.
In when-issued trading, the 8 1/4% seven-year note was 5/32 higher, at 100 17/32-100 21/32, to yield 8.12%. The issue has improved sharply since it was auctioned at an average of 8.26% last Wednesday.
Rates on Treasury bills were mixed, with the three-month bill up one basis point at 5.57%, the six-month bill steady at 5.68%, and the year bill one basis point lower at 5.88%.
June producer prices fell 0.3%, when economists had expected a 0.1% decline. And the core rate, excluding food and energy prices, was flat, when the consensus forecast was for a 0.1% increase.
Last month's retail sales report also contains some surprises. June sales declined 0.2%, to $151.9 billion, when the Street expected a 0.7% increase. Sales including autos were even weaker, falling 0.5% when economists had predicted a 0.2% increase.
Economists lauded the improvement in the price measure, but were more cautious about interpreting the unexpected decline in sales.
David Wyss, chief financial economist at DRI/McGraw Hill, said the sales report was worrisome, especially since the weakness was so widespread.
"People just slowed down in buying everything, despite the fact that consumer confidence improved," Mr. Wyss said.
But he pointed out that the weakness in June followed a big gain in May, "so some of this may just be a correction."
Joan Schneider, a money market analyst at Continental Illinois National Bank, suggested it would be more accurate to consider the average of the weak June numbers and the strong May sales data. May sales gain was revised to 0.8% from the 1.0% rise originally reported.
"There's a sense that in May, unusually early warm weather got people to go out and buy what they usually buy in June," Ms. Schneider said.