Treasury prices made modest gains in hushed trading yesterday as participants settled in to wait for the upcoming May price reports.
Late in the afternoon, the 30-year bond was almost 1/2 point higher and yielded 6.87%. while note prices were up as much as 1/4 point.
Traders said the market was correcting itself after having overreacted to Friday's employment report. The healthy gain in May jobs pushed all Treasury prices lower on Friday, with short-term securities posting the biggest losses.
A bond trader said the lack of follow-through selling by investors and portfolio managers convinced some participants to cover short positions yesterday.
Traders said the long end of the market may have benefited as more investors put on curve-flattening trades by setting up short positions at the front end and buying long-term paper. But they pointed out that the yield curve did not change much yesterday, which suggests that curve-flattening trades were not a major factor.
Traders said there was also talk yesterday that issuers were buying Treasuries to use in municipal defeasance deals. They said the decline in the price of gold was another plus. Late yesterday, spot gold stood at $373.50 an ounce, down $2.40 from Friday's close.
A note trader described yesterday's activity as "very sleepy." Traders said volume should pick up as the week goes on, but they do not expect any dramatic price moves until Friday, when the May producer price and retail sales reports will be released.
The Treasury market has been worrying about inflation and the possibility of a Federal Reserve tightening since the April producer and consumer price reports posted outsized gains. The stronger-than-expected May employment report convinced participants the Fed will not hesitate to raise short-term rates if the May inflation indexes show the same big gains that were posted in April.
But economists are not expecting bad inflation news. They say Friday's May producer price report and the May consumer price index due out next week will show only small increases. The consensus forecast for May producer prices calls for no change in the overall index and a 0.2% rise in the core rate, excluding food and energy costs.
Traders said participants are beginning to realize that their inflation fears are overblown. That outlook may allow for some price improvement at the short end as the week goes on, they said.
"You may see the front end catch up a bit," said Peter Mayers, a vice president at Bank Julius Baer. "To the extent people have money that has to be put to use, they may come into the front end in the belief that it's low risk because a tightening to 3 1/4% is priced in."
The Treasury sold $24 billion of short-term bills yesterday. The three-month bills were auctioned at an average rate of 3.14% and the six-month bills were sold at 3.30%.
The market showed no reaction to the Federal Reserve's report yesterday afternoon that consumer installment credit grew $2.28 billion in April. Economists expected a $3 billion increase.
The Fed also said March's rise in credit was revised down, to $2.9 billion from the $3.4 billion reported last month.
The September bond futures contract closed 14/32 higher, at 110 22/32.
In the cash market, the 7 1/8% 30-year bond was 15/32 higher, at 103 3/32-103 5/32, to yield 6.87%.
The 6 1/4% 10-year note rose 1/4, to 101 11/32-101 13/32, to yield 6.05%.
The three-year 4 1/4% note was up 1/32, at 98 29/32-98 31/32, to yield 4.62%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point, at 3.11%, the six-month bill steady, at 3.29%. and the year bill two basis points lower, at 3.50%.Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 3.15 3.11 2.926-Month Bill 3.37 3.29 3.051-Year Bill 3.62 3.60 3.202-Year Note 4.27 4.24 3.753-Year Note 4.62 4.60 4.125-Year Note 5.31 5.36 5.017-Year Note 5.68 5.77 5.5110-Year Note 6.05 6.17 5.8730-Year Bond 6.87 6.97 6.80