Treasury prices drifted lower yesterday as the market waited nervously for this morning's May employment statistics.

The worries about toady's data increased when the market got more signs of economic strength in yesterday's weekly jobless claims report and the May chain store sales figures.

By late in the afternoon, the 30-year bond was 3/8 point lower to yield 8.42%.

Treasury prices have been falling all week on statistics that show "the first glimmer of a recovery," said Jan Hurley, a senior market analyst at Chase Securities. "The claims data and the slightly stronger-than-expected chain store sales were just more of the same news."

Prices had risen slightly in overseas trading, but quickly slid after the Laobr Department said new claims for unemployment insurance fell 6,000 to 439,000, in the week ended May 25. That was a little disappointing, since the market had been expecting a 5,000 increase.

But participants were more concerned about the 82,000 drop in the number of those receiving unemployment benefits, to 3.512 million, in the week ended May 18.

That is the same week the May employment survey was taken and the decline suggested today's May nonfarm payrolls may show more strength than expected.

"I think we're seeing a little improvement in the economy," said Matthew Alexy, a money market economist at Deutsche Bank Governments Securities.

But Mr. Alexy, who forecast a 195,000 drop in May payrolls, on the high side of market estimates, said he will not change his number.

Some of the drop in continuing claims may be related to people exhausting their benefits, he said.

In another negative for the bond market yesterday morning, some chain stores reported decent May sales, suggesting consumer demand may be perking up. The strongest results came from discount stores, with Wal-Mart reporting a 13% same-store gain.

Economists surveyed by The Bond Buyer expect, on average, a 78,000 decline in May payrolls and a rebound in the unemployment rate to 6.8%, reversing April's decline.

Some traders argued yesterday that Treasury prices are likely to move lower no matter what today's employment numbers look like.

A coupon trader said investors are not looking as much at the jobs data, which are seen as lagging indicators, as at all the stronger-than-expected numbers that have come out in recent days, such as Monday's national purchasing managers report.

Since that array of numbers has changed retail investors' attitude toward the market, if the employment report is good news and sends prices higher, "I think some accounts are going to say, 'We'll sell on this rally,'" the trader said.

A note trader agreed any rise in prices would bring forth retail selling.

"An awful lot of retail customers are long and we've heard of a lot of sellers that last two days," the trader said. "On any kind of uptick, you're going to see selling."

But Ms. Hurley said the market might not have much downside left, since prices have already fallen sharply this week as participants adjusted to the idea that the economy is doing better.

"It's come pretty far, pretty fast," she said. "While price erosion is probably the name of the game here, until we get a better picture of where we're going, I think a lot of [potential] badness has been discounted."

The September bond futures contract closed 7/32 lower at 93 16/32.

In the cash market, the 30-year 8 1/8% bond was 11/32 lower, at 96 21/32-96 25/32, to yield 8.42%.

The 8% 10-year note fell 9/32, to 98 13/32-98 17/32, to yield 8.21%.

The three-year 7% note was down 5/32, at 99 6/32-99 8/32, to yield 7.28%.

Rates on Treasury bills were mixed, with the three-month bill one basis point lower at 5.56%, the six-month bill off one basis point at 5.71%, and the year bill one basis point higher at 5.91%.

Fed Reports Forex Moves

U.S. monetary authorities intervened on both sides of the foreign exchange market earlier this year, ending nine months of intervention restraint, the Federal Reserve Bank of New York said yesterday.

As the dollar hit historic lows against the German mark in February, the Fed bought $1.4 billion with marks. Then, when the dollar began a sharp increase in March, it sold $400 million for marks and Japanese yen.

The announcement is the first official recknoning of the Fed's activities during the three months from February to April. Over the course of the period, the dollar rose 15% against the mark and 3 3/4% against the yen.

Sam Y. Cross, executive vice president in charge of the foreign group at the Fed, explained the initial intervention as a response to significant "negative sentiment" against the dollar in early February.

On February 11, the dollar fell to its lowest point ever against the German currency -- 1,4430 marks -- and had declined significantly against most other major currencies as well.

Mr. Cross said several factors contributed to the dollar's weakness during the period, including international interest rate differentials, predictions of continued deterioration of the U.S. economy, and uncertainty about the outcome of the Persian Gulf war.

The U.S. intervened with a large purchase of dollars for marks "in order to try to reinstitute of two-way sense of risk in the market and get away from the view that the dollar could only go down," Mr. Cross said.

The strategy worked to stabilize the dollar, but changing world economic events soon intervened. A renewed sense of optimism about the U.S. economy and a quick end to the war gave the dollar new strength, and the Fed intervened in mid- and late-March to sell dollars for marks and yen.

The U.S. Treasury and the Federal Reserve shared equally in the intervention activity, Fed officials said.

In other news, a spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply fell $1.2 billion to $851.8 billion in the week ended May 27; the broader M2 aggregate dropped $2.2 billion, to $3.4 trillion; and M3 decreased $1.8 billion, to $4.2 trillion, in the same period.

Also, for the week ending Wednesday, the federal funds rate averaged 5.91%, up from 5.72% the previous week, according to the New York Fed.

Staff reporter Steven Dickson contributed to this column.

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