Treasury prices climbed yesterday after an unexpected increase in new jobless claims encouraged hopes for another easing in Federal Reserve monetary policy and spurred heavy buying of Treasury securities.
By late in the afternoon, the 30-year bond was up 5/8 point to yield 7.76%, while short-term notes were up 1/8 to 3/8 point. Prices began to rise yesterday morning after the Labor Department said new filings for unemployment insurance rose 16,000 to 422,000 in the week ended June 13. The market had expected a small decline in claims.
The increse in claims "is a reflection of the fact that the labor market continues to be in a weak position," said Stephen Gallagher, an economist at Kidder Peabody & Co.
Mr. Gallagher noted that weekly jobless claims have been hovering just above 400,000 for the last two months, after improving dramatically in March.
Paul Lally, an economist at R.H. Wrightson & Associates, said the increase in claims was "not a healthy sign.
"You would expect to see some improvement in the job market" by this point in the recovery, Mr. Lally said, but added that the drop in the number of people receiving state benefits partly offset the increase in new claims.
The Labor Department said the number of people receiving state benefits in the week ended June 6 fell 116,000 to 3.265 million.
Traders said the rise in new claims also led to speculation that next Thursday's report on June nonfarm payrolls would show similar weakness.
The increase in jobless claims seemed to echo the unexpected weakness in another indicator, Wednesday's 2.4% decrease in May durables orders. And the two indicators, together with President Bush's call for another cut in interest rates, have heightened the market's expectations for a near-term Fed easing.
The jobless claims and durable goods numbers "really are increasing the odds the Fed will decide to ease policy at next week's meeting," Mr. Lally said. "We think they would prefer not to. They would prefer to wait for all their prior moves to be reflected in the economy, but the political pressure is intense, inflation seems to be on the back burner, and there's little to lose with another small ease."
Other analysts say, though, that the Fed has plenty of evidence the economy has begun to recover, including the revised 2.7% increase in first-quarter output that was reported yesterday. That evidence suggests the Fed need not loosen policy.
President Bush's comment may also work to keep policy steady, economists say, since it means the Fed will be more concerned about appearing to be caving in to political pressure.
"Even if they were inclined to ease quickly, which we don't believe, the President's comment would lead them to lean the other way," said Scott Winningham, chief market analyst at Stone & McCarthy Research Associates in Princeton, N.J.
Mr. Winningham said he does not expect the Fed to cut rates unless the Fed gets evidence of further economic weakness.
Analysts agreed the Fed will probably wait until after the Federal Open Market Committee meeting Tuesday and the June employment report Thursday before making any change in policy.
Prics posted most of their gains right after the jobless claims number came out, then moved a little higher near the close of the futures market. There were reports that Johnson Smick International, a Washington consulting firm, had told its clients the Fed might move as soon as today, and that rumor may have helped the market move higher during the afternoon.
Traders said they saw good buying, especially in intermediates. There were also reports of extension trades, including swaps of 10-years for bonds, and of money moving into the Treasury market from mortages and corporates.
Some of yesterday's activity reflected quarter-end trades and reinvestment of funds freed up when municipal bonds were called.
Mr. Winningham said the market put in an impressive technical performance.
The September bond futures contract closed at the day's high, 100-24/32, which is also the highest closing level since Jan. 22, he said.
Even though yesterday's gains were predicated on the likelihood of another Fed easing, many traders are skeptical about that notion and wary about current price levels.
A short-term note trader argued that the market's upside seemed to be limited.
"The long end is held down by a bunch of factors and the short end is fully priced to another Fed easing," he said.
Late yesterday, the two-year note was yielding 115 basis points more than the funds rate. If the Fed eased a 1/4 point, the two-year yield would be 140 basis points over funds, and that spread is "a little tight," the trader said.
"I'm not negative, I'm just not comfortable buying up here," he said.
The September bond futures contract closed 19/32 higher at 100-24/32.
In the cash market, the 30-year 8% bond was 5/8 higher, at 102-17/32-102-21/32, to yield 7.76%.
The 7-1/2% 10-year note rose 3/8, to 102-14/32-102-18/32, to yield 7.13%.
The three-year 5-7/8% note was up 5/32, at 101-11/32-101-13/32, to yield 5.34%.
In when-issued trading, the 5% two-year note was 1/8 higher, at 100-6/32-100-7/32, to yield 4.88%, and the five-year 6-3/8% note was up 11/32, at 100-6/32-100-8/32, to yield 6.31%.
Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.63%, the six-month bill off two basis points at 3.71%, and the year bill two basis points lower at 3.90%.
In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly news briefing that the nation's M1 money supply fell $2.9 billion to $953.1 billion in the week ended June 15; the broader M2 aggregate declined $2.6 billion, to $3.5 trillion; and M3 also fell $2.6 billion, to $4.2 trillion, in the same period.
Also, for the week ended Wednesday, the federal funds rate averaged 3.72%, down from 3.73% in the previous week, according to the New York Fed. Treasury Market Yields
Thursday Week Month
3-Month Bill 3.69 3.68 3.74
6-Month Bill 3.81 3.81 3.93
1-Year Bill 4.05 4.06 4.15
2-Year Note 4.88 4.88 5.20
3-Year Note 5.34 5.42 5.75
4-Year Note 6.30 6.32 6.63
5-Year Note 6.31 6.34 6.65
7-Year Note 6.70 6.76 7.00
10-Year Note 7.13 7.17 7.35
15-Year Bond 7.43 7.45 7.62
30-Year Bond 7.76 7.79 7.85
Source: Cantor, Fitzgerald/Telerate