Long-term Treasury prices declined Friday on a stronger-than-expected Philadelphia Fed report and the market's realization that the exit of Ross Perot from the presidential race does not guarantee President Bush's reelection.

Late Friday afternoon, the 30-year bond as 3/4 point lower to yield 7.67%.

Treasury prices began to slide in overseas trading on reports that Democratic presidential candidate Bill Clinton was outpolling Mr. Bush.

On Thursday, the bond market improved after Mr. Perot announced he would not run for President, in part because many traders assumed his supporters would shift to the Republican camp.

But overnight, CNN reported a survey indicating that over half of Mr. Perot's voter would go over to the Democratic candidate instead. The survey also showed that in a two-man race, Mr. Clinton led Mr. Bush 56% to 33%.

The bond market took another step lower in morning trading when the Philadelphia Fed's survey of local businesses showed manufacturing activity in its district was picking up.

The Philadelphia Fed's diffusion index rose to 27% in July from 10.9% in June, the largest one-month increase in the index in more than four years.

The Philadelphia index represents the difference between the number of people seeing an improvement in business and those seeing deterioration. The Philadelphia Fed said 32% of the firms surveyed said business activity was growing, while just 5% said activity was declining. Sixty-two percent said activity was unchanged.

Peter Mayers, assistant treasurer at Bank Julius Baer, said the bond market may have paid too much attention to the Philadelphia number, given that it tracks only a small section of the economy.

Anthony Karydakis, senior financial economist at First Chicago, said the Philadelphia report was just an excuse for dealers who wanted to sell.

"It's the end of the week and people are reassessing the wisdom of holding onto positions," Mr. Karydakis said. "I think some of the less confident longs are getting out."

The bond market paid little attention to the economic news that was in its favor Friday, including the May merchandise trade report and University of Michigan's preliminary report on July consumer sentiment.

A big drop in exports caused the May trade gap to widen, and analysts said the report showed that weakening demand for U.S. products overseas will be another problem for the already lackluster economic recovery.

The May trade deficit increased to $7.4 billion from a revised $7.1 billion gap in April. Economists expected the trade deficit to narrow to $6 billion in May.

Both exports and imports fell in May, but exports posted the bigger decline, dropping 2.5% to $35.5 billion from $36.41 in April. May imports decreased 1.4% to $42.9 billion, from $43.47 billion in April.

Michael Moran, chief economist at Daiwa Securities, said the decline in exports was the third in a row and suggested U.S. exports were losing momentum.

"Based o these numbers, the trade sector is going to be a constraining force, at least in the second quarter," Mr. Moran said.

Analysts revised down their estimates for second-quarter gross domestic product in the wake of the trade report.

Steve Slifer, a money market economist at Lehman Brothers, said the weak export numbers pushed his estimate for second-quarter output down to 1.2% from 1.8%. "It also helped lower my estimate for the third quarter to 1.5% from 2.5," he said.

"The basic message is that the export boom that has been carrying us for so long really does seem to have petered out," said Robert Dederick, chief economist at the Northern Trust Co. "One more prop under the expansion is proving to be weaker than we thought."

The market also ignored the University of Michigan's preliminary survey of July consumer sentiment, which was release to subscribers at about the same time the Philadelphia Fed report came out. The university's index dropped to 77.1 from 80.4 in June.

Bond traders said the continuing deterioration of the dollar was another concern on Friday. The dollar, which was battered Thursday by the Bundesbank's rate increase, dropped more on the jump in the May trade deficit. Late in the day, the dollar was quoted at 1.4580 marks, down from 1.4790 late Thursday.

Traders said activity was brisk at the front end, which got a temporary boost from fading stock prices during the morning trading session. But they blamed the volatile price action at the long end on a lack of of liquidity and a number of rumors.

The September bond futures contract closed 21/32 lower at 102 4/32.

In the cash market, the 30-year 8% bond was 25/32 lower, at 103 20/32-103 24/32, to yield 7.67%.

The 7 1/2% 10-year note 5/16, to 104 5/32-104 9/32, to yield 6.89%.

The three-year 5 7/8% note was down 1/8, at 102 30/32-103, to yield 4.72%.

Rates on Treasury bills were mixed, with the three-month bill off one basis point at 3.17%, the six-month bill unchanged at 3.22%, and the year bill two basis points higher at 3.36%.

This Week's Activity

Given the dearth of economic news this week, the main event will be Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony tomorrow, analysts said.

Charles Lieberman, a managing director at Chemical Securities, said Mr. Greenspan's comments are not likely to provide much information.

"I expect him to be highly repetitive and blow as much smoke as possible," Mr. Lieberman said. "He's got a lot of explaining to do because the economy has done so badly and he had been quite positive about the outlook."

Prices on short-term Treasury securities have already begun to reflect the possibility of another Fed easing. But Mr. Lieberman said Fed chairmen are expected to sound positive about the economy, so the market might not react that badly if Mr. Greenspan sounds optimistic.

Mr. Slifer said Mr. Greenspan might surprise the bond market and present a less rosy picture.

"I don't know how he can present that same upbeat testimony and maintain his credibility," Mr. Slifer said. "We're heard this from him for a year, going back to his Humphrey-Hawkins testimony in July of last year, and he's been proven dead wrong."

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 3.21 3.28 3.72

6-Month Bill 3.29 3.36 3.87

1-Year Bill 3.47 3.56 4.13

2-Year Note 4.22 4.34 4.96

3-Year Note 4.72 4.84 5.47

5-Year Note 5.79 5.90 6.42

7-Year Note 6.37 6.42 6.82

10-Year Note 6.89 6.90 7.23

15-Year Bond 7.24 7.22 7.51

30-Year Bond 7.67 7.59 7.82

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