The Treasury market staged an impressive rally yesterday as additional evidence of economic weakness set off a wave of retail buying.
The 30-year bond closed more than 1-1/2 points higher, where it yielded 7.89%.
Early in the New York session, the market jumped when the gross national product report showed inflation pressures eased during the third quarter.
At mid-morning, prices moved still higher when the Conference Board reported consumer confidence plunged during October.
And traders said Fed Chairman Alan Greenspan's pessimistic comments Monday continued to bolster the market yesterday. Mr. Greenspan called the economy "sluggish" and said the recovery was not up to par.
"There's nothing better than having the Fed chairman put out a buy recommendation on bonds," a government securities salesman said.
Traders and analysts said the indicators and Mr. Greenspan's remarks added to the market's conviction that the economy is still struggling to recover and the Fed will ease again soon to give it a hand.
In addition to the good retail interest yesterday, there were many reports of portfolio managers moving money out the yield curve.
"What you saw in here was some funds making some pretty big moves," said a sales manager at
Treasury Market Yields
Tuesday Week Month
3-Month Bill 5.01 5.19 5.23
6-Month Bill 5.10 5.34 5.33
1-Year Bill 5.16 5.42 5.39
2-Year Note 5.76 6.00 5.97
3-Year Note 6.05 6.26 6.19
4-Year Note 6.20 6.41 6.38
5-Year Note 6.78 6.97 6.87
7-Year Note 7.15 7.35 7.21
10-Year Note 7.48 7.66 7.42
15-Year Bond 7.73 7.89 7.69
30-Year Bond 7.89 8.09 7.79
Source: Cantor, Fitzgerald/Telerate
He said many portfolio managers were reversing moves made earlier in the month, when they shortened the average duration of their holdings as long-term prices plunged.
"Now they've moved back out, but there's still a healthy level of skepticism about the bond," given the supply coming at next week's quarterly refunding, and that made the 10-year note a major bendficiary of yesterday's rally, the sales manager said.
Another source of buying was technical traders who went short last week when various moving averages turned negative and were forced to cover those positions, the salesman said.
Third-quarter output rose 2.4%, in line with the consensus forecast of a 2.5% increase, and on the low side of the 2.5% to 3% range that Treasury Secretary Nicholas Brady had talked about over the weekend.
Analysts said the 2.4% gain was not that strong for the early part of an economic recovery.
And John Lonski, a senior economist at Moody's Investors Service, questioned how much of the third-quarter gain was sustainable. Stronger auto and home sales both contributed to the third-quarter strength, but both have fallen off recently.
But the best news for the market was the report's inflation measures, both of which came in lower than expected. The implicit deflator rose 1.8%, down from the 4.5% gain in the second quarter, and the fixed-weight deflator was up only 2.1% after rising 3.1% during the second quarter.
Mr. Lonski said both deflators looked good compared to the 3.3% increase in consumer prices and the 4.6% rise in consumer prices, excluding food and energy, that were posted during the third quarter.
The inflation readings suggest "that if we look at all goods and services being produced in the economy, instead of just focusing on those included in the consumer price index, we are perhaps seeing a brighter picture," Mr. Lonski said.
The "major deceleration" in the deflators "tells you inflation is okay, despite the CPI statistics that have come out over the past few months," said Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp.
Good price numbers are heartening for bond traders because inflation expectations are an important component of the long-term securities prices. And at the short end, the numbers were seen as "giving the Fed the green light if they want to ease," said Kevin Flanagan, an economist at Dean Witter Reynolds Inc.
He added, though, that the Fed would probably wait to see Friday's October employment report before making any change in policy.
And the talk about Fed easing took on a new dimension yesterday when The Washington Post said Fed policymakers had authorized Mr. Greenspan to ease 50 basis points in September, instead of the 25 basis points the market had been assuming.
The market got its second wind yesterday when the Conference Board said consumer confidence fell to 60.4 in October, down 12.5 points from September's 72.9 reading. That is close to the recent low of 55.1 posted in January and well below the high so far this year, the 81.1 March reading that came as consumers celebrated the end of the Gulf War.
"What type of recovery is this if consumer confidence has declined for six out of the last seven months?" Mr Lonski said.
He said the responses to the survey's question on job prospects was significant. More than 43% of the people surveyed said jobs are "hard to get," while only 5.7% described jobs as "plentiful."
"The sharp decline in consumer confidence may be signaling that the October employment report due this Friday will be considerably weaker than generally anticipated," Mr. Lonski said. The consensus forecast is for a 25,000 gain in October non-farm payrolls.
Yesterday's third-quarter employment cost index showed a small improvement, rising only 0.9% for a 4.3% year-over-year gain. That is below the second quarter's 1.2% increase and 4.6% year-over-year gain, but analysts said the market was too preoccupied with the GNP data to pay much attention to employment costs.
The December bond future contract closed 1 13/32 higher at 96 26/32.
In the cash market, the 30-year 8 1/8% bond was 1 9/16 higher, at 102 17/32-102 21/32, to yield 7.89%.
The 7 7/8% 10-year note rose one point, to 102 16/32-102 20/32, to yield 7.48%.
The three-year 6 7/8% note was up 9/32, at 102-102 2/32, to yield 6.05.
Rates on Treasury bills were lower, with the three-month bill down seven basis points at 4.89%, the six-month bill off 10 basis points at 4.92%, and the year bill 11 basis points lower at 4.91%.