The Treasury market breathed a sigh of relief Friday when the July employment statistics showed another month of lackluster economic growth.
The report inspired heavy retail buying and by the end of the day, prices were close to the highest levels seen this year.
Late Friday afternoon, the 30-year bond was 7/8 point higher and yielded 7.39%, its lowest closing yield since early January.
"We saw very strong interest in the market all day," said the head of a Treasury trading desk. "It was broad-based buying, not particularly price-sensitive."
With the economy growing in slow motion and inflation remaining well-behaved, economist say the yield on long-term Treasury securities can go even lower, to 7 1/4% or possibly even 7%.
But the market's gains may be limited this week by the Treasury's auctions of $36 billion of notes and bonds, they said.
Once the confusion about a federal summer jobs program for teenagers was cleared up, the July payrolls statistics were close to the market's expectations.
The Labor Department said 123,000 jobs were added to non-farm payrolls last month, excluding the 75,000 jobs created by the summer jobs program. Taking into account the revised 63,000 decline in June, payroll growth averaged 30,000 a month over the last two months.
Kathleen Stephansen, senior economist at Donaldson, Lufkin & Jenrette Securities Corp., said the statistics depicted an economy with "a relatively sluggish profile.
David Wyss, chief financial economist at DRI/McGraw-Hill, said the employment report was good news for the bond market.
"There's certainly no excess of growth out there, nor any reason to worry about inflation," Mr. Wyss said.
Analysis said the details of the jobs report suggest industrial output and personal income will also post only small gains in July.
"The manufacturing sector is very weak, with employment there up only 1,000," Ms. Stephansen said. "With the average workweek having remained unchanged, one should not expect any dramatic increase in industrial production."
The employment report showed the average factory workweek was unchanged at 41 hours in July, factory overtime decreased to 3.8 hours from 3.9 hours in June, and average hourly earnings were unchanged at $10.58.
Mr. Wyss said the flat hours and wages components suggest "July will be another soft month for income and that does not bode well for consumers spending."
Treasury prices fell overnight as foreign investors sold securities ahead of the jobs report, then erased those losses and moved higher after the report was released.
The yield curve steepened Friday as short-term and intermediate securities outperformed the long end, and analysis said that reflected some hopes that the modest economic growth in July will pave the way for another easing in Federal Reserve monetary policy.
Anthony Karydakis, senior financial economist at First National Bank of Chicago, said the jobs data "reopened the issue of another Fed move down the road."
The employment report offered no evidence that growth will pick up in the future and depicted a recovery that "looks too fragile, if you're the Fed, to just sit back and watch," he said.
Mr. Karydakis does not expect any immediate action from Fed policymakers. "The issue will be deferred to the Aug. 18 [Federal Open Market Committee] meeting and they may even decide to hold off until they see another month's employment numbers," he said.
The employment report and the bond market's strong performance after the report came out left many participants with high hopes for the market.
Kevin Logan, chief economist at Swiss Bank Corp., said he thinks the long bond yield can go to 7 1/4% once the supply is out of the way. The outlook for Treasury prices gets "hazy" in September, though, he said, when the presidential campaign starts to heat up.
Mr. Karydakis said a 7% yield on the long bond is a possibility, although he acknowledged the bond would run into tremendous resistance when it hit 7 1/4%.
Some participants feel the market may have gone too far on Friday given the quantity of new securities to be auctioned this week.
The Treasury will sell $15 billion of three-year notes tomorrow, $11 billion of 10-year notes Wednesday, and $10 billion of 30-year bonds on Thursday.
Mr. Karydakis said the employment report created "an ideal environment for the long end going into supply."
He said this week's economic news should be favorable for the market. The numbers include July producer prices on Wednesday, and July consumer prices and retail sales data on Thursday.
"It's already established that inflation remains under control and both PPI and CPI should show routine gains," Mr. Karydakis said.
He also expects a weak retail sales report, as last month's soft auto sales offset the reasonable gains in other areas.
The desk head said there were other reasons to expect more buying of Treasury securities. A lot of the money being raised in the corporate market is not needed immediately and ends up being reinvested in Treasuries, he said, as does the money raised to defease high-coupon municipal bonds.
He said the buying also reflects investors' growing preference for "plain-vanilla" debt. "People have been IO'd and PO'd and prepaid to death," he said, referring to the interest-only and principal-only instruments that have brought grief to some mortgage-backed investors recently.
Other traders were dubious about the price levels the market reached Friday and predicted prices will fall sometime this week.
A coupon trader said the market might inflict the most possible pain on dealers by waiting to sell off until after the issues have been auctioned.
"It would not surprise me if we stub our toes on one of these issues," the desk head said. "But if the buying continues at the pace it did [Friday], the odds of that happening will shrink rather than grow."
The September bond futures contract closed 3/4 higher at 105 28/32, after briefly trading to a new high at 106 4/32.
In the cash market, the 30-year 8% bond was 27/32 higher, at 107 4/32-107 8/32, to yield 7.39%.
The 7 1/2 10-year note rose 21/32, to 106 21/32-106 25/32, to yield 6.54%.
The three-year 5 7/8% note was up 11/32, at 103 9/32-103 11/32, to yield 4.57%.
In when-issued trading, the 30-year bond to be sold Thursday was bid at 7.35%, the 10-year note to be auctioned Wednesday was quoted at 6.54%, and the three-year note to be sold tomorrow was yielding 4.71%.
Rates on Treasury bills were lower, with the three-month bill down one basis point at 3.15%, the six-month bill off five basis points at 3.19%, and the year bill 11 basis points lower at 3.29%.