Weak economic reports provided the Treasury market with a solid base of support yesterday, but trading was generally muted ahead of tomorrow's employment report for August.
The 30-year bond ended up 2/32 to yield 6.08%, the lowest level since the Treasury began regular bond auctions in 1977.
The long bond outperformed other issues as bad news on the economy and good news on oil prices prompted participants to extend out on the yield curve and purchase bonds. Oil prices dropped below $18 per barrel yesterday as fears of strikes in Nigeria abated.
The market is anxiously awaiting the jobs report because it will provide participants with their first comprehensive look at the economy's performance in August. Until then, participants expect little more than quiet day-trading.
While reports released yesterday provided further evidence that the economy continues to struggle and that the employment sector is still in a slump, market sources said that further evidence of weakness is needed to justify the lofty levels of prices.
Particularly against the backdrop of a surprising upward revision to second quarter gross domestic product, the jobs report will help the market figure out whether the rally will continue or if a correction is warranted.
"The employment report will be the mover or the shaker," said Steven Slifer, a managing director and money market economist at Lehman Brothers. "The market needs the weakness of the economy confirmed by the employment report."
Trading volume has virtually ground to a halt ahead of the release and investors are likely to. stay clear of the market until after the jobs report appears, participants said.
"There's nothing going on in the market until the report," said Andy O'Flaherty, head of trading at Nomura Securities International.
Estimates for the jobs report center on an increase of about 160,000 non-farm payroll jobs and a slight rise in the civilian unemployment rate to 6.9%, according to a survey of economists conducted by The Bond Buyer.
A number of weak economic reports helped the market recoup early losses yesterday and end the day in positive territory.
The National Association of Purchasing Management's index decreased to 49.3% in August from 49.5% in July, the third straight month the index was below 50.0%. A reading above 50.0% generally indicates the manufacturing sector is expending, while a reading below that level indicates it is contracting.
The most important component of the NAPM report for the market was the employment index, which fell to 44.0% in August, the lowest reading since May 1991.
The employment index prompted some economists to lower their estimates for the August employment report and prompted retail buying of Treasuries.
Lynn Reaser, chief economist at First Interstate Bank, said the report showed that the manufacturing sector continues to struggle. Like most analysts, she found the deterioration in the employment index particularly disturbing.
"The employment component indicates that more companies are laying off workers than hiring them," Reaser said. "That's not a good sign for manufacturing or the economy."
The Commerce Department reported a 0.5% decline in construction spending in July to $458.2 billion, as a drop in private construction more than offset a gain in public construction. This followed a revised 1.8% advance in June, previously reported as a 1.2% increase.
Total private construction dropped 1.5% in July to $329.4 billion, following a 0.9% increase in June. Non-residential building fell 5.6% to $86.6 billion in July, following a 1.1% increase in June.
Elias Bikhazi, money market economist at Deutsche Bank, said the report shows that construction remains depressed, despite the lowest mortgage rates in 20 years.
The Commerce Department also reported that personal income fell 0.2% and personal spending gained 0.4% in July. Analysts on average had expected both reports to gain 0.3% in July. Income declined 0.1% in June, previously reported as unchanged, and spending in June advanced 0.7%, earlier reported as a 0.6% increase.
The back-to-back declines in income were the first since March and April of 1954, according to Commerce. The Midwest flood and the Southeast drought depressed income in July.
Reaser and other Treasury market observers said that the report did little more than support the market's view of overall economic conditions.
"The economy is still growing but growing slowly," she said. "The economy still seems to be on this erratic course of growth."
In other positive developments for the market, the Clinton administration yesterday reduced its forecasts for short-term and long-term interest rates and said it is hopeful rates will stay low as the economy grows moderately over the next five years, according to the Office of Management and Budget's mid-session. The OMB does not see rates on 10-year Treasury notes rising above 6%.
In futures trading, the September contract ended down 5/32 to 119.17.
In the cash markets, the two-year note was quoted late yesterday unchanged at 100.00-100.01 to yield 3.85%, the 4 3/4% five-year note ended down 1/32 at 99.23-99.25 to yield 4.80%, the 5 3/4% 10-year note was up 1/32 at 102.08-102.10 to yield 5.49%, and the 6 1/4% 30-year bond was at 102.06-102.08 to yield 6.08%.
The three-month Treasury bill was unchanged at 3.01%, the six-month bill was down one basis point at 3.11%, and the year bill was down two basis points at 3.24%.Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.05 3.03 3.136-Month Bill 3.18 3.17 3.301-Year Bill 3.34 3.33 3.542-Year Note 3.85 3.84 4.163-Year Note 4.17 4.18 4.465-Year Note 4.80 4.82 5.227-Year Note 5.03 5.08 5.5110-Year Note 5.44 5.49 5.8730-Year Bond 6.08 6.16 6.55Source: Cantor, Fitzgerald/Telerate