Treasury note and bond prices closed lower Friday after a wave of profit taking during the afternoon wiped out the gains made earlier on some favorable economic news.
Late in the day, the 30-year bond was off 1/8 to yield 7.76%, and shorttern notes were marginally lower on the day.
Long-term prices had rallied Friday morning on the moderate 0.4% gain in November consumer prices and Ford Motor Corp.'s report that its car sales dropped 33% in early December
But selling pressure eroded those gains Friday afternoon, and traders said investors were showing disappointment that the Federal Reserve did not signal an ease Friday after the price report showed inflation pressures remained under control.
"If they didn't get [an ease] today, they don't think they'll get it next week," said the head trader at one primary dealer.
"People were not too fussy about how they sold it, since the market was at the best levels we've seen recently," he said. "They felt comfortable just hitting the bid."
He also said as the market broke below certain technical levels, that set off additional selling.
Treasury Market Yields
Friday Week Month
3-Month Bill 4.24 4.33 4.67
6-Month Bill 4.32 4.37 4.76
1-Year Bill 4.42 4.49 4.83
2-Year Note 5.05 5.16 5.48
3-Year Note 5.40 5.51 5.85
4-Year Note 5.51 5.64 5.93
5-Year Note 6.26 6.27 6.52
7-Year Note 6.71 6.73 6.93
10-Year Note 7.19 7.22 7.29
15-Year Bond 7.54 7.49 7.63
30-Year Bond 7.76 7.79 7.81
Source: Cantor, Fitzgerald/Telerate
Karen Gibbs, a senior futures analyst at Dean Witter Reynolds Inc., said the downtrade reflected "profit-taking ahead of the weekend and disappointment that the Fed didn't ea e."
The March bond futures contract traded as high as 101 9/32, "just shy of the 101 10/32 life-of-contract high," and when the market couldn't get above that level, selling emerged, she said.
The sales manager at another firm said curve trades, rather than profit-taking, may have been the driving force in the market Friday, but said he'd also seen a fair number of off-the-run securities being traded.
A rebound in the Commodity Research Bureau index and gains in monetary aggregates reported late Thursday were other factors that may have inspired selling, traders said.
Even though traders may have gotten discouraged Friday, the market is still hoping for a Christmas present from the Fed this week. But analysts say Treasury prices are likely to hold up even if the central bank proves stingy.
Persistently weak economic statistics -- especially the huge drop in November nonfarm payrolls -- have fueled to widespread expectations that the Federal Reserve is about to signal another cut in interest rates.
Even though the Fed just lowered the funds rate 25 basis points on Dec. 6 -- the day the jobs report was released -- most participants hope the Federal Open Market Committee meeting that begins tomorrow will result in a 1/2-point drop in the discount rate, to 4%, and another 1/4-point cut in funds, to 4 1/4%.
Analysts said the moderate November inflation reports released last week have given the Fed the leeway to move again. But some thought the 0.3% gain in November retail sales took some pressure off the Fed, since its showed consumer spendng was not totally defunct.
Jan Hurley, a senior market analyst at Chase Securities, said that if the Fed does not move by Wednesday morning, short-term prices might erode going into the two-year auction that afternoon and the five-year sale on Thursday.
The Treasury plans to sell $13.5 billion of two-years and $9 billion of five-years then.
Short-term securities have already accounted for a Fed easing in current price levels, "so the short end is likely to back up if Fed doesn't ease by bidding time Wednesday," Ms. Hurley said.
But she said price losses would be limited because a delay will not change the market's belief that the inert economy requires further Fed action.
Frederick Leiner, a market strategist at Continental Illinois, argued that the Fed will wait, since it has been fairly aggressive recently, cutting the funds rate five times in the last five months. And Fed Vice Chairman David Mullins's comments last week suggested policy-makers think "there is a great deal of monetary stimulus inthe pipeline" already, Mr. Leiner said.
But he agreed that the Treasury market could retain its good tone even if the Fed did nothing.
"Even if they don't ease when the market expects them to, prices are not going to set back significantly," Mr. Leiner said. "The talk of an ease is not going to go away."
He added that the two-year sale should draw good buying, as usual, by financial institutions.
The Fed's moves and the Treasury auctions will overshadow this week's indicators, analysts said.
Today's November industrial production is old news, since it's derived from the employment report, and traders are not likely to pay much attention to Thursday's October merchandise trade report or the fourth, and final, revision to third-quarter output to be released Friday.
The only number with any crowd appeal is tomorrow's November housing starts report. Economists will be watching to see how lower mortgage rates are affecting the housing sector. The consensus is for a small decline, after October's 6.8% gain.
The March bond future contract closed 1/2 lower at 100 15/32.
In the cash market, the 30-year 8% bond was 3/16 lower, at 102 17/32-102 21/32, to yield 7.76%.
The 7 1/2% 10-year note fell 1/8, to 102-102 4/32, to yield 7.19%.
The three-year 6% note was down 1/32, at 101 17/32-101 19/32, to yield 5.40%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 4.15%, the six-month bill up one basis point at 4.18%, and the year bill three basis points higher at 4.23%.
Even though the 0.4% gain in November consumer prices was higher than the 0.3% increase economists had predicted, analysts said it was nothing to worry about.
The November gain reflected some special factors and should not stand in the way of another Fed easing, they said.
"The headline is not appealing, but the internals are no problem," said Bob Dieli, a business economist at Northern Trust Co. "When you look at why it was up more than expected, there's nothing to get excited about."
Last month's increase compared with a 0.1% gain in October. November's core rate, excluding food and energy prices, was up 0.3%, in line with expectations.
One factor pushing the November index higher was the 4.4% jump in fruit and vegetable prices, but analysts said that was due to the white fly infestation in California.
Food prices are always volatile, Mr. Dieli said. He pointed out that over the past year, fruit and vegetable prices rose only 3.1%, and overall food prices, which increased 0.6% in November, were up only 1.6%.
Another reason for November's bigger-than-expected rise was a 0.9% jump in energy prices, with gasoline posting a 1.3% gain.
But Matthew Alexy, a money market economist at Deutsche Bank Government Securities, said the recent declines in crude oil prices suggest energy prices will fall in coming months. Year-over-year, gasoline is down 16.6%.
And Mr. Alexy said the 1.0% gain in the costs of apparel and apparel upkeep was related to earlier-than-usual discounting by stores.
"I don't think apparel prices will stay up if the consumers are not spending," he added.
October inventories rose 0.4%, more than the 0.1% gain the market expected, but that was partly offset by a downward revision to September's gain.
And Mr. Leiner said even though the October report showed an increase, he does not see current levels as particularly alarming for this stage of an economic cycle.
Later in the day, auto sales came in at a 5.5 million rate, down from the 6.0 million pace that analysts expected.