Big gains in all three measures of the money supply pushed Treasury prices lower yesterday afternoon.
The late-day dip punctuated an otherwise quiet session. as the market quieted down after the big price swings of the previous two days.
Late in the day, the 30-year bond was off more than 1/4 point to yield 6.99%, while note prices were as much as 1/4 point lower.
The New York Fed said the nation's M1 money supply rose. $10 billion to $1.1 trillion in the week ended May 10, while the broader M2 aggregate jumped 20.1 billion. to $3.5 trillion and M3 increased $22.6 billion, to $4.2 trillion.
The increases were far higher than the consensus forecast, and the surge in M2, the most closely watched of the measures, means that the aggregate is posting an increase over its fourth-quarter average for the first time this year.
Economists cautioned against reading too much into one week's worth of numbers. But Carol Stone, senior economist at Nomura Securities International, said it was interesting that the increases within M2 came in liquid categories like savings deposits and NOW accounts.
"If this were to be sustained, it would suggest there was building wherewithal for increasing spending," Stone said.
Michael Moran, chief economist at Daiwa Securities America, said the surge in money supply growth could have occurred because seasonal factors magnified a change in this year's level of tax payments.
But Moran said the bond market's negative reaction is consistent with its recent preoccupation with Fed monetary policy.
"I think a lot of people are very nervous about a Fed tightening of monetary policy, because of the inflation numbers we've had, and this would be one argument reinforcing that move." he said.
For most of the session, Treasury prices were stuck in a narrow range centered on Wednesday's closing levels. Traders said volume was light and liquidity was poor.
Charles Lieberman, a managing director at Chemical Securities, said bond market participants were "beginning to ask more serious questions ask to whether inflation pressures have worsened as much as they feared a couple of days ago,"
The worries about inflation led to speculation earlier this week that Federal Reserve officials might tighten monetary policy at Tuesday's Federal Open Market Committee meeting.
That speculation died down Wednesday after the Fed signaled that it was still targeting a 3% funds rate. But traders said the talk started up again yesterday, spurred by a Wall Street Journal reporter's speculation that the Fed adopted a bias toward tightening at Tuesday's meeting.
Alan Murray, who covers economics for the Wall Street Journal, said on NBC's Sunrise program yesterday morning that, "my guess, based on conversations I had with Fed officials before the meeting, is that they made a decision not to raise rates right now but to adopt a directive that leans toward interest rate increases in coming weeks if they continue to see signs of inflation."
Lieberman said he thought traders overreacted because the initial rumors in the market about Murray's comment suggested Murray knew what the Fed had done.
"What he was saying was that he himself was guessing that the Fed had adopted an assymetric bias but he didn't have any information to that effect," Lieberman said.
Most economists think the lackluster pace of economic growth will deter the Fed from tightening monetary policy. The results of Tuesday's meeting will not be released for six weeks, but this afternoon the Fed will release the minutes of its previous meeting, on March 23, which may give some clue to policymakers' thinking on inflation.
Traders said the Philadelphia Fed's weaker-than-expected report on local business activity in May had helped support the long end of the market yesterday morning.
The Philadelphia Fed's diffusion index fell to 11.3% in May from 24.6% in April. According to the report, manufacturing in the Philadelphia area continued to grow, but at a slower pace, and businesses were less optimistic about future growth.
As the day progressed, a spike in commodity prices disconcerted the market. The Commodity Research Bureau index closed 1.41 points higher yesterday, at 210.99.
The market paid little attention to the weekly jobless claims statistics released yesterday morning. The Labor Department said new claims for state unemployment benefits rose 7,000 to 344,000 in the week ended April 15, from a revised 337,000 . in the previous week. Economists had expected a 2,000 increase.
The June bond futures contract closed unchanged at 11 In the cash market, the 7 1/8% 30-year bond was 9/32 lower, at to yield 6.99%.
The 6 1/4% 10-year note fell to yield 6.07%.
The three-year 4 1/4% note was down 3/32, at 99 12/32-99 14/32, to yield 4.45%.
In when-issued trading, the two-year notes to be sold Tuesday were bid at 4.12% and the five-year notes to be auctioned Wednesday were quoted at 4.29%.
Rates on Treasury bills were mixed, with the three-month bill down one basis point at 2.97%, the six-month bill unchanged at 3.08%, and the year bill one basis point higher at 3.24%.
In other news, the New York Fed reported the federal funds rate averaged 3.01% for the week ended Wednesday, up from 2.90% the previous week.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.01 2.96 2.866-Month Bill 3.15 3.09 2.991 Year. Bill 3.34 3.29 3.132-Year Note 4.02 3.90 3.703-Year Note 4.46 4.36 4.115-Year Note 5.25 5.13 5.007-Year Note 5.69 5.62 5.4610-Year Note 6.07 6.01 5.8530-Year Bond 6.99 6.94 6.74Source: Cantor, Fitzgerald/Telerate