The Treasury market is expected to remain volatile this week as traders deal with successive shock waves from the presidential election, the announcement of the quarterly refunding, and the October employment report.
Economists say current Treasury prices look cheap, given the economy's lackluster performance, and most expect the market to move higher before the end of the year, no matter which candidate is elected.
But the uncertainty created by the elections, the payrolls data, and the upcoming supply may limit any short-term gains, they said.
Last week, prices moved around quite a bit as dealers bid on almost $26 billion of short-term notes amid uncertainty about the presidential election.
Traders said the material received a small boost late in the week from polls showing some improvement in President Bush's standing among voters. But they were desinclined to bet on a Bush victory because they think Democratic candidate Bill Clinton still has a lead in the electoral college.
Traders say prices will surge if Bush is re-elected.
Some think a Clinton victory would also help prices because it would remove some of the uncertainty from the market, while others predict a modest price decline if Clinton wins.
Analysts say the market will quickly shift its focus back to the economic fundamentals, and particularly to Friday's employment report, once the election is out of the way.
Early forecasts for October payrolls call for a rise of 40,000 to 50,000 jobs once departing teenage summer workers are excluded.
Ward McCarthy, a managing director at Stone & McCarthy Research Associates, is expecting a more robust gain of 60,000 jobs, but says the improvement is due to the unusually long survey period rather than economic strength.
The September survey week occurred earlier than usual and the October week was later than usual. and the combination should add 125,000 to 130,000 jobs to October payrolls, McCarthy said.
Treasury prices lost ground abruptly Friday morning when an unexpectedly robust home sales number gave investors an excuse to sell.
By late Friday, the 30-year bond was off 1/2 point, to yield 7.62%.
Traders said the selling was heaviest in the intermediate area, and intermediate-term notes suffered the biggest losses, with the 10-year note down 3/4 point and the seven-year off almost 5/8 point.
In addition to the worries about the presidential election, investors are concerned about this Friday's October employment report and the quarterly refunding auctions the following week.
"When in doubt, people would rather be short," a government bond rather said.
A note trader said the five-year notes sold in September were Friday's hot potato and estimated as many as $ 2 billion of the notes were sold.
"The issue just fell apart," he said.
The trader said in addition to the political uncertainty and the upcoming supply, participants are worried about the possibility the economy is finally getting back on its feet. He cited the October home sales report as one sign of that revival.
On the surface, homes sales looked like good news for the bond market, declining 1% in September when economists had expected a small increase. But the slip in September home sales was overshadowed by a big upward revision to August's figure.
August now shows a 1.6% increase instead of the 6.1% decline reported last month, and the combined change left September new home sales at a 617,000 annual rate instead of the 578,000 the market expected.
But analysts said even with the revision of August's number, home sales are still growing only modestly.
"The trend in the housing market is still one of cautious improvement," said Stephen Roach, a senior economist at Morgan Stanley.
And Joseph Liro, chief economist at S.G. Warburg, said the housing numbers were "good, but they weren't great."
Liro said that if interest rates continue to rise, even that moderate improvement in the housing sector will be threatened.
The market ignored the friendlier economic news released Friday.
The Purchasing Management Association of Chicago reported a dramatic plunge in October activity. Its index fell to a seasonally adjusted 49.7% in October, down from 59.6% in September, and on an unadjusted basis the index came in at 50.5%, down from 59.4% in September.
And the University of Michigan told subscribers its October survey of sentiment came in at 73.3. That is down from the 75.6 reading in September but almost unchanged from the preliminary October of 73.2 released earlier last month.
Traders said some participants who owned short-term bills were unhappy with news the Treasury plans to sell $15 billion of 41-day cash management bills next Thursday.
No one seemed to care about the Treasury's borrowing needs announcement.
The Treasury said Friday it will borrow $87 billion during the current quarter, down from its earlier estimate that it would need $110 billion to $115 billion this quarter, but higher than most economist expected. The Treasury said it would need to sell only $65 billion to $70 billion during the first quarter.
The December bond futures contract closed 3/8 lower at 102 24/32.
In the cash market, the 7 1/4% 30-year bond was 18/32 lower, at 95 16/32-95 20/32, to yield 7.62%.
The 6 3/8% 10-year note fell 25/32, to 97-97 4/32, to yield 6.78%.
The three-year 4 5/8% note was down 9/32, at 99 12/32-99 14/32, to yield 4.84%.
In when-issued trading, the 4 1/4% two-year note was 1/8 lower at 99 23/32-99 24/32 to yield 4.38%, and the 5 3/4% five-year note was down 13/32, at 99 13/32-99 15/32, to yield 5.87%.
Rates on Treasury bills were higher, with the three-month bill up two basis points at 2.97%, the six-month bill up two basis points at 3.20%, and the year bill six basis points higher at 3.40%.
Treasury Market Yields
Friday Week Month
3-Month Bill 3.01 2.99 2.66
7-Month Bill 3.27 3.27 2.84
1-Year Bill 3.51 3.51 2.96
2-Year Note 4.38 4.32 3.27
3-Year Note 4.84 4.86 4.10
5-Year Note 5.87 5.87 5.19
7-Year Note 6.34 6.39 5.77
10-Year Note 6.78 6.80 6.23
30-Year Bond 7.62 7.63 7.32
Source: Cantor, Fitzgerald/Telerate