Treasury prices ended slightly lower yesterday, with the 30-year bond off 1/4 point to yield 7.61%, as both the jobless claims and money supply statistics showed modest improvement.
But the market's real focus yesterday was the wild price action during the morning, when an improper trade on the Chicago Board of Trade caused an exaggerated move to the downside. followed by an equally strong rebound.
Prices began to fall in early New York trading when the Labor Department reported a bigger than expected drop in new filings for unemployment insurance.
Claims fell 15,000, to 368,000, in the week ended Oct. 10, when the consensus forecast called for a 15,000 increase, to 398,000.
Analysts noted that new filings for state benefits have now fallen three weeks in a row. Claims declined 17,000, to 383,000, in the week ended Oct. 3 and were off 25,000, at 399,000, in the previous week.
"One week does not make a trend, but three weeks start to look interesting." said Anthony Chan, senior economist at Barclays de Zoete Wedd Securities. "It looks as if the labor market is trying to show signs of life."
Still, economists cautioned that the Oct. 10 claims report may have been distorted lower by the seasonal adjustment factor. And they said that even if job losses were beginning to abate, the economy was still far from vigorous growth.
As the market began to move lower in response to the jobless claims, a member of the Chicago Board of Trade bought a quantity of November puts and sold December bond futures.
Prices gapped lower and broke below technical support levels, which in turn generated more selling. At one point the long bond was off almost a point.
Some Treasury traders thought the trade was an error, arguing it would have been more usual to hedge the position in puts by selling contracts.
Things got wilder when the Board of Trade's Office of Investigations and Audit reportedly escorted the person who executed the trades from the pit, apparently because he was not authorized to deal in financial futures.
As the improper trade was unwound and other participants covered short positions, the market retraced all of that early loss by midday, and moved into positive territory by early afternoon.
Participants said the Chicago trade pushed Treasury prices far lower than they would have gone otherwise, with estimates of the damage it caused ranging from 10/32 to 5/8 point, and also artificially boosted the market's recovery.
David B. Prosperi, a spokesman for the Board of Trade, said it was investigating "allegations of possible trading violations" and could not give any details of what happened yesterday until its investigation is complete.
Later in the afternoon, the market headed lower as the short covering that fueled the bounce off the lows dried up.
The news of stronger-than-expected gains in all three measures of the money supply also put downward pressure on prices during the afternoon.
A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing yesterday that the nation's MI money supply rose $6.7 billion to $1 trillion in the week ended Oct. 12; the broader M2 aggregate increased $9.5 billion, to $3.5 trillion, and M3 jumped $33.4 billion, to $4.2 trillion.
The robust increases in the money supply, combined with the bigger-than-expected decline in jobless claims, suggest the economic fundamentals are "a little shaky," the bond trader said.
He predicted the market would trade near current prices going into the two- and five-year auctions scheduled for Tuesday and Wednesday.
After the ups and downs this week, "I think the market's a little cleaner as far as positions go, so the downside may be a little less impulsive," he said. "But I think people feel the market's still under pressure."
Other traders said the retail selling that emerged yesterday and Wednesday was a hopeful sign.
"I think we've got a floor and we're settling out," a note trader said, adding the retail interest suggests any moves lower will be orderly ones.
But he added that with the presidential election and lots of Treasury issuance coming up, the most the bond market can hope for would be a "corrective up move."
That kind of move "might be good for a 1/2 point or a point on the 10-year," he said. "But the supply will put an end to it."
Traders said comments by Robert Parry, president of the San Francisco Fed, also helped the market as it rallied off its lows yesterday morning.
Parry expects sluggish third-quarter growth and said another easing in monetary policy is still possible.
The December bond futures contract closed 3/8 higher at 102 29/32.
In the cash market, the 7 1/4% 30-year bond was 7/32 lower, at 95 19/32-95 23/32, to yield 7.61%.
The 6 3/8% 10-year note fell 1/8, to 97 6/32-97 10/32, to yield 6.75%.
The three-year 4 5/8% note was off 3/32, at 99 17/32-99 19/32, to yield 4.77%.
In when-issued trading, the two-year note to be sold Tuesday was offered at 4.34% and the five-year note to be auctioned Wednesday stood at 5.86%.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 2.94%, the six-month bill three basis points higher at 3.18%. and the year bill four basis points higher at 3.36%.