Treasury prices headed lower Friday as bond market participants lightened their positions ahead of this week's deluge of supply.
Late in the afternoon, the 30-year bond was 3/4 point lower and yielded 7.75%, the highest closing level since late June.
The 27,000 increase in October payrolls reported Friday morning matched the market's expectations, but convinced participants the Federal Reserve would not lower interest rates any time soon.
Traders said that disappointment, combined with continued uneasiness about a possible pickup in the economy and about President-elect Bill Clinton's economic plans, led to steady selling through the day.
Despite the dramatic rise in interest rates in recent weeks, traders are worried about finding enough buyers for this week's auctions.
The sheer quantity of securities is part of the problem. The Treasury will sell $60.6 billion of new paper, beginning with $23.6 billion of bills and $15.5 billion of three-year notes today, followed by $11.25 billion of 9 3/4-year notes tomorrow and $10.25 billion of 30-year bonds Thursday. The cash market will be closed Wednesday for Veterans Day.
Traders and analysts say the uncertainty in the market is multiplying the normal pre-auction worries. Participants fear Gov. Clinton will stimulate the economy at the expense of the budget deficit, and they are looking for clues to Clinton's plans in his first rounds of appointments.
"We're in an extremely precarious and volatile state because the market will react to political appointments," a note trader said. "I think the market would be quick to veto any unproductive moves by the Clinton administration."
William Griggs, an economist at Griggs & Santow Inc., said the possibility the Clinton administration could make an unpopular appointment or release damaging news about a fiscal stimulus package means dealers want to be sure the refunding auctions come at yields high enough to ensure quick distribution of the paper.
"They don't want to sit on [the newly auctioned securities] because of the possibility of scary talk about the fiscal package," he said.
At the same time, Griggs and other participants had encouraging things to say about the first two refunding auctions.
"There's all kinds of dough around," said Griggs. "Banks are up to their eyeballs in it, and they'll buy the three-year. And with the backup in yields, the three-year is looking more attractive than it did."
Traders agreed the three-year notes were trading at an inviting spread to the funds rate and argued that most of the 10-year notes are already spoken for. The Treasury is reopening the 6 3/8% 10-year issue that it auctioned in August because the issue had become so scarce.
But no one had a good word to say for the 30-year sale.
A bond trader cited the lack of demand for long-term paper and the fears that Clinton might run up the deficit and said the bonds could get to 7.90% or 8% by the time they are auctioned.
Another bond trader said the outcome of the three- and 10-year auctions would set the stage for the bond sale, but admitted that the outlook seemed bleak.
"What has been scary is the complete lack of volume in the cash bond, " he said. "It trades as if it has no sponsorship whatsoever. "
Payrolls Data as Expected
The Labor Department said October nonfarm payrolls rose 27,000, in line with the consensus forecast, and posted a 49,000 increase when departing teenage summer workers were excluded. September's change was revised down to a 72,000 decline from the 57,000 decrease reported last month.
"The employment report was generally disappointing," said Paul Lally, an economist at R.H. Wrightson & Associates. "It looks as if the economy is not moving ahead with any celerity."
In addition to the summer jobs workers, the growth in payrolls also was depressed by the 35,000 post office employees who took early retirement. On the plus side, rebuilding after hurricane Andrew added 12,000 jobs in the construction category.
Analysts said the most disturbing piece of news in the report was the 56,000 drop in manufacturing employment.
Bob Dieli, a business economist at Northern Trust Co., said the loss of 337,000 manufacturing jobs over the past year indicates there are still fundamental problems in that sector, problems that cloud the outlook for overall growth in the economy.
"You just don't make substantial progress without active involvement by the manufacturing sector," he said.
The unemployment rate declined 0.1 -point in October, to 7.4%, bu analysts said the decrease was no really good news for the economy.
"We continue to achieve this by shrinking the labor force, and that's not the way you want to do it," Dieli said. "The circumstances causing that [lower unemployment rate] are not indicative of economic strength."
Analysts said the jobs report leaves Fed policy on hold.
"The bottom line is you're still seeing a modest recovery," said Daniel Seto, an economist at Nikko Securities. "There's no substantial weakness here to indicate the Fed is going to be easing.
"The decline in manufacturing jobs is worrisome, but there are other signs out there to suggest you are seeing some pickup in activity," Seto said. "A number of Fed officials have been talking about easings in the pipeline, and I think what we're seeing now will make them more comfortable with that."
The December bond futures contract closed 27/32 lower at 101 15/32
In the cash market, the 7 1/4% 30-year bond was 23/32 lower, at 94 2/32-94 6/32, to yield 7.75%.
The 63/8% 10-year note fell 3/4, to 95 25/32-95 29/32, to yield 6.95%.
The three-year 4 5/8% note was down 10/32, at 99 4/32-99 6/32, to yield 4.94%.
In when-issued trading, the three-year note to be sold today was bid at 5.11%, the 6 3/8% 9 3/4-year note to be auctioned tomorrow was bid at 6.99%, and the 30-year bond to be sold Thursday stood at 7.74%.
Rates on Treasury bills were higher, with the three-month bill six basis points higher at 3.07%, the six-month bill up seven basis points at 3.27%, and the year bill 10 basis points higher at 3.46%.
Treasury Market Yields
Friday Week Month
3-Month Bill 3.11 3.01 2.86
6-Month Bill 3.35 3.27 3.03
1-Year Bill 3.57 3.51 3.15
2-Year Note 4.46 4.38 3.96
3-Year Note 4.94 4.84 4.43
5-Year Note 6.02 5.87 5.49
7-Year Note 6.52 6.34 6.08
10-Year Note 6.95 6.78 6.50
30-Year Bond 7.75 7.62 7.51
Source: Cantor, Fitzgerald/Telerate