Short End Leads Market Higher As Indicators Feed Easing Hopes

A buoyant front end led the rest of the Treasury market higher yesterday after more weak indicators lent support to the case for another easing by the Federal Reserve.

Late in the day, short-term notes were up 1/8 to 1/4 point, while the benchmark 30-year bond had gained 1/8 point and was yielding 7.88%.

"The story today was that euro-dollars, bills, and twos all were trading very well, anticipating a Fed ease," a government note trader said. "The long end got sucked up by the short end."

Michael Strauss, an economist at UBS Securities, said that in addition to the expectations of further Fed easing, an article in yesterday's Wall Street Journal about certificates of deposit also helped the front end.

The Journal article suggested small investors should move money from low-yielding certificates of deposit into Treasury notes.

Treasury prices "moved up on the releases, weakend on profit-taking during the morning, then worked their way back up to the day's highs during the afternoon," Mr. Strauss said.

The new two-year note was the star performer yesterday, and there were reports that one institutional investor had snapped up as many as $1 billion of the notes.

Late in the day, the when-issued 6 1/8% two-year note was up 5/32, at 100 4/32-100 5/32, to yield 6.04%, down from the 6.14% average at Tuesday's auction.

Both the numbers yesterday morning were favorable for the bond market, but traders focused on the newest information, the jobless claims.

The Labor Department reported new claims for unemployment insurance rose 36,000, to 439,000, in the week ended Sept. 14, after dropping 17,000 the week before.

New claims were depressed the previous week because of the Labor Day holiday, and economists had expected yesterday's claims figure to rebound, but only by about 20,000.

"The fact that it went to 439,000 was significant," said Marylin Schaja, an economist at Donaldson, Lufkin & Jenrette Securities Corp. "It's definitely something to think about in terms of the labor market possibly being weaker than we'd thought."

Yesterday's claims report carried special impact because it was for the week in which the Labor Department conducted the survey for next Friday's September employment report.

But Ian Borsook, a senior economist at Merrill Lynch Capital Markets, said looking at the four-week moving average, which evens out weekly fluctuations, shows claims are still hovering around the 420,000 level.

"We don't seem to be getting much improvement, but claims are still below where they were earlier in the year," Mr. Borsook said.

Yesterday's other indicator, the final revision to the second-quarter gross national product, showed output during the second quarter decreased 0.5%.

That was down from the 0.1% decrease reported last month and an earlier estimate of a 0.4% increase.

But analysts pointed out that the downward revision reflected more inventory liquidation, which sets the stage for an upturn in production in the current quarter.

Late in the day, Treasury prices slipped only slightly when the money supply figures showed bigger gains than expected.

A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply rose $2.4 billion to $869.7 billion in the week ended Sept. 16; the broader M2 aggregate gained $5.2 billion, to $3.4 trillion; and M3 increased $6.6 billion, to $4.1 trillion, in the same period.

The December bond future contract closed 1/4 point higher at 99 6/32.

In the cash market, the 30-year 8 1/8% bond was 3/16 higher, at 102 21/32-102 25/32, to yield 7.88%.

The 7 7/8% 10-year note rose 3/16, to 102 5/32-102 9/32, to yield 7.54%.

The three-year 6 7/8% note was up 7/32, at 101 15/32-101 19/32, to yield 6.28%.

In when-issued trading, the 7% five-year note was up 7/32, at 99 29/32-99 31/32, to yield 7%.

Rates on Treasury bills were lower, with the three-month bill off three basis points at 5.14%, the six-month bill down four basis points at 5.17%, and the year bill five basis points higher at 5.17%.

In other news, the New York Fed said that for the week ending Wednesday, the federal funds rate averaged 5.29%, down from 5.44% the previous week.

Table : Treasury Market Yields

Prev. Prev.

Thursday Week Month

3-Month Bill 5.27 5.33 5.44

6-Month Bill 5.37 5.46 5.52

1-Year Bill 5.45 5.54 5.65

2-Year Note 6.04 6.16 6.34

3-Year Note 6.28 6.41 6.64

4-Year Note 6.50 6.61 6.79

5-Year Note 7.00 7.07 7.31

7-Year Note 7.34 7.40 7.64

10-Year Note 7.54 7.60 7.80

20-Year Bond 7.78 7.84 7.99

30-Year Bond 7.88 7.91 8.05

Source: Cantor, Fitzgerald/Telerate

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