The Treasury market rendered a mixed decision on yesterday's economic news as long-term prices moved higher on a good inflation report and the short end sold off on further evidence that the job market is improving.
Late in the afternoon, the 30-year bond was up 1/8 point and yielded 7.42%, while short-term notes were down as much as 1/8 point on the day.
Traders said the market had performed well given the unexpected strength seen in the jobless claims report.
The Labor Department said 324,000 people applied for state unemployment benefits in the week ended Nov. 28, down 38,000 from the previous week. That is the lowest weekly total in more than three years. Economists had expected little change in claims.
The government also reported that in the week ended Nov. 21, the number of people receiving state benefits fell 26,000, following the 113,000 decrease in the previous week.
Analysts said the decline in new claims was probably exacerbated by the Thanksgiving holiday, when state unemployment offices closed for one or two days.
Still, they said, both new claims and the number of people on state jobless rolls are clearly heading lower.
"We have to respect the trend, and the trend suggests something is going on," said Robert Dederick, chief economist at the Northern Trust Co. "Businesses are taking a more forthcoming attitude than other times" when the economy has begun to pick up.
At the long-end, the signs of improvement in the labor market were offset by the better-than-expected November producer price report.
November producer prices fell 0.2%, and the core rate of producer prices, excluding food and energy, was up only 0.1%. The consensus forecast called for a 0.1% gain in the index and a 0.2% rise in the core rate.
Peter Greenbaum, an economist at Smith Barney, Harris Upham & Co., said the report shows wholesale prices are low and heading lower. The producer price index was up only 1.3% from a year ago, while the core rate was up 1.8%, he said.
The decline in prices was led by a 1.5% drop in energy costs and a 0.5% decrease in food prices, with vegetable prices falling 33%.
Dederick said the improvement in food prices was probably temporary, but the decline in energy costs was "more fundamental.
"I think OPEC is really struggling to hold up prices," Dederick said.
"Unless it has some luck on the weather front, it won't get the prices it wants," and energy costs can decline more in the months ahead, he said.
As the long end outperformed the short end yesterday, they yield curve flattened. Late in the day, the 30-year bond was yielding 277 basis points more than the two-year note, down from 284 late Wednesday.
Elias Bikhazi, an economist at Deutsche Bank Government Securities, said the market's tone was firm. "It's really reacting well and holding up in the face of negative news," as has been the pattern in recent days, he said.
A short-term note trader attributed the firm tone to the temporary absence of supply and dealers' low inventories of fixed-income securities.
Government dealers cleaned off their shelves a littler earlier this year, remembering how hard it has been to get rid off-the-run paper late in the year, the trader said. Meanwhile, corporate and mortgage-backed inventories are also down, which allows firms to take off hedges in the Treasury market.
Traders said some investors were putting on curve-flattening trades yesterday and others were just extending the maturities of their holdings.
"Some people are making a strategic decision that the front end has very limited upside and saying, ~What I'm hearing from Clinton and company sounds positive; I think I'll extend,'" a coupon trade said.
Traders do not expect any big moves on today's numbers. The market has already priced in the consensus expectation of a modest 0.2% gain in November consumer prices and a similar 0.2% rise in last month's retail sales, they said, and it would take a surprise to get the market going.
President-elect Bill Clinton's announcement of his economic team had no impact on prices because the appointments had already been reported. But some traders liked the emphasis Clinton and his choice as Treasury Secretary, Sen. Lloyd Bentsen, D-Tex., placed on reducing the budget deficit.
Clinton tapped two Wall Street habitues for his economic team. Robert Rubin, co-chairman of Goldman, Sachs & Co., was named head of the new national economic council, and Roger Altman, an investment banker from the Blackstone Group, will be the deputy Treasury secretary.
Late in afternoon, gains in all three measures of the money supply weighed on short-term prices a little.
A spokesman for the Federal Reserve Bank of New York reported at the bank's weekly news briefing that the nation's M1 money supply rose $6.1 billion to $1 trillion in the week ended Nov. 30; the broader M2 aggregate gained $5.7 billion, to $3.5 trillion; and M3 increased $400 million, to $4.2 trillion.
The Treasury sold $14.78 billion of year bills at an average rate of 3.57% yesterday, and analysts said the below-average bid-to-cover ratio showed demand was only moderate. By late yesterday, the rate on the when-issued bills had deteriorated to 3.61%.
The March bond futures contract closed 2/32 higher at 104 8/32.
In the cash market, the 7 5/8% 30-year bond was 5/32 higher, at 102 10/32-102 14/32, to yield 7.42%.
The 6 3/8% 10-year note rose 1/32, to 97 10/32-97 14/32, to yield 6.73%.
The three-year 5 1/8% note was down 1/32, at 99 28/32-99 30/32, to yield 5.14%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 3.23%, the six-month bill up two basis points at 3.37%, and the year bill six basis points higher at 3.58%.
In other news, the New York Fed reported the federal funds rate averaged 2.94% for the week ended Wednesday, down from 3.37% the previous week.