Treasury prices soared Thursday when the feeble June employment statistics showed the U.S. economy lost some ground last month and might even be in danger of slipping back into recession.
By the end of the shortened trading session, the 30-year bond was up 1 1/2 points and yielded 7.62%, the lowest closing yield since late January.
The cash Treasury market closed early, at 1 p.m. eastern daylight time, ahead of the three-day Independence Day weekend.
The 117,000 drop in June non-farm payrolls shocked bond traders; the consensus forecast had called for an increase of 94,000 jobs. At the same time, the unemployment rate rose to 7.8%, its highest level in eight years, from 7.5% in May.
Economists said the details of the jobs report were just as bleak as the headlines, and the Federal Reserve's swift reaction underscored how bad the news had been.
The Fed cut the discount rate 50 basis points, to 3% from 3 1/2%, early in the session. Most analysts interpreted the Fed's system repurchase agreements later in the morning as a signal of a matching 50 basis point cut in the funds rate, to 3 1/4% from 3 3/4%.
Ward McCarthy, a managing director at Stone & McCarthy Research Associates in Princeton, N.J., called the employment report "horrendous."
The number were "not only weaker than expected, but just outright weak," he said. "To the extent that the story of this recovery has been two steps forward, one step back, this is a giant step back."
Mr. McCarthy said he does not think the economy is on the brink of another contraction, but he described the recovery as fragile and susceptible to bad news.
If the economy's problems were compounded by some external event like a war or an oil-price shock," it would not take a lot to head us back into a recession," he said.
The situation is complicated by the fact that the Fed does not have a lot of ammunition left, Mr. McCarthy said. With consumer price inflation running at about 3%, another cut in the discount rate would put the inflation-adjusted rate into negative territory.
The 117,000 drop in June nonfarm payrolls followed a revised 93,000 gain in May. The May increase was originally reported as a 68,000 rise.
Some analysts said the jobs report may have exaggerated the weakness in June employment. June payroll numbers are often subject to revisions, and the seasonal factors meant to adjust for an influx of students into the work force might have had a negative impact on the payroll statistics, they said.
But Carol Stone, a senior economist at Nomura Securities, said the fact that payrolls declined even in industries where seasonal workers are not a big factor suggested "substantive weakness" in June employment.
The declines in payrolls were widespread and included a 58,000 decrease in manufacturing jobs, a 32,000 drop in construction employment, a 20,000 drop in retail jobs, and a 15,000 decrease in service jobs.
In addition, the Labor Department reported declines in the average workweek, the factory workweek, and overtime hours.
Traders said retail investors were eager buyers Thursday on the news of economic weakness.
Treasury Market Yields
Thursday Week Month
3-Month Bill 3.29 3.29 3.75
6-Month Bill 3.43 3.81 3.97
1-Year Bill 3.69 4.05 4.25
2-Year Note 4.55 4.88 5.19
3-Year Note 5.06 5.34 5.72
4-Year Note 6.01 6.30 6.58
5-Year Note 6.02 6.31 6.58
7-Year Note 6.48 6.70 6.98
10-Year Note 6.91 7.13 7.34
15-Year Bond 7.24 7.43 7.61
30-Year Note 7.62 7.76 7.87
Source: Cantor, Fitzgerald/Telerate
"The action was fast and furious," a note trader said.
The trader said buyers dominated the market for most of the morning.
"There was better selling after the [funds] rate cut, but the market held in," The trader continued, adding that he had also seen investors moving out the curve to pick up yield.
The Treasury market closed near its highs Thursday, and some people expect securities to add to those gains this week.
With little economic news due out until Friday's report on June producer prices, the memory of the weak jobs data will linger, and "the market will keep a fairly good buying tone as you go through the week," said Jan Hurley, a senior market strategist at Chase Securities.
Ms. Hurley said the June employment report shows it is possible the Fed will ease again and unlikely it will tighten any time soon.
Given that scenario, the two-year note's spread to the funds rate might narrow to 100 basis points, allowing its yield to fall another 25 basis points, she said.
Ms. Hurley was less optimistic about the prospects for long-term prices. For one thing, the seven-year note sale on Wednesday could put some pressure on long-term prices, she said. The Treasury plans to sell $9.75 billion of seven-years.
But some traders argued that extension trades will bolster the intermediate sector, if not the long end.
"As people get disgusted with 4.5% returns on two-year notes, they will start moving out the curve," the bond trader said. "Fives and 10s will continue to improve."
Eventually, the trader expects the strength to reach even the 30-year, which he thinks will test the 7 1/2% yield level.
Mr. McCarthy said the new range on the bond is 7 5/8% to 7 3/4%. He pointed out that the bond "screeched to a halt" at 104 14/32 Thursday, which corresponds to that 7 5/8% level, and said that suggests there is formidable resistance there.
That 7 5/8% will probably hold "unless we outright go into a recession," he said. "But I don't think that will happen. I think we'll continue to struggle along."
The September bond futures contract closed 1 19/32 higher at 102 18/32.
In the cash market, the 30-year 8% bond was 1 13/32 higher, at 104 7/32-104 11/32, to yield 7.62%.
The 7 1/2% 10-year note rose 1 5/32, to 103 7/32-104 3/32, to yield to 6.91%.
The three-year 5 7/8% note was up 9/16, at 102 2/32-102 4/32, to yield 5.06%.
Rates on Treasury bills were lower, with the three-month bill down 31 basis points at 3.24%, the six-month bill off 28 basis points at 3.35%, and the year bill 30 basis points lower at 3.57%
In when-issued trading, the seven-year notes to be auctioned Wednesday were bid at 6.50%.
After the Treasury market's early close Thursday, the Fed released another week's worth of sluggish money supply numbers.
A spokesman for the Federal Reserve Bank of New York reported at the bank's weekly press briefing that the nation's M1 money supply fell $4.2 billion to $948.9 billion in the week ended June 22; the broader M2 aggregate plunged $10.6 billion, to $3.5 trillion; and M3 decreased $10 billion, to $4.2 trillion, in the same period.
Also, for the week ending Wednesday, the federal funds rate averaged 3.87%, up from 3.72% the previous week, according to the New York Fed.