Treasury prices ended higher yesterday after a rough morning.
In thin, early trading, prices dropped on unfavorable inflation news. But the market recaptured its losses by afternoon and held steady in advance of tomorrow's August employment report.
Bond prices began falling after the Commerce Department reported that the sensitive materials component accounted for a 0.27% increase in its July index of leading economic indicators. The component also was the biggest contributor to the gain in the June index. As a whole, the indicators were unchanged for July.
"The leading indicators were very much in line with expectations," said money market economist Marilyn Schaja of Donaldson, Lufkin & Jenrette Securities Corp.
More important news for traders came later in the morning, when the Chicago purchasing managers' prices paid index jumped to 79.3% in August from 71.9% in July. The figure has not been that high since October 1990, when it registered 80.5%.
The index "spiked, so it bashed the market a little," a note trader said.
For the most part, the trader said, volume will remain light at least until the August employment figures are released. The market is trading at the upper end of its range, he said, and retail accounts are waiting on the sidelines for more encouraging news.
Consensus opinion is that nonfarm payroll employment will rise by 200,000 to 258,000 jobs in August, which would indicate continuing labor market strength.
Bill Sharp, an economist with Smith Barney Inc., said the bond market would not be affected by a higher employment figure if it matches economists' predictions. If the nonfarm jobs figure comes in below 200,000, he said, the market may react positively.
But, Sharp said, "what would disturb the market more could be the average hourly earnings. Last month, it was much higher than expected, up 0.4% in July from the June figure. If we see that in August, it could hamper the market more than a large payroll number."
Bond investors fear inflationary growth because it chips away at the value of fixed-income securities.
Also yesterday, U.S. factory orders were reported to have fallen 2.3% in July -- no surprise to the market -- with orders dropping largely due to temporary auto plant closings. The July decrease, the first since February, followed a June increase of 0.8%.
By midday, prices in the short end were down a tick or unchanged. The long end, which dropped as much as 12/32 when the prices paid index jumped, recovered much of the losses to hover at slightly lower levels than on Tuesday.
"The market is showing some resiliency," said Anthony Karydakis, vice president and senior financial economist at First Chicago. By midafternoon, he said, Treasuries had regained the ground they lost in the morning.
Prices ended up slightly, with the benchmark 30-year bond gaining 1/8 of a point to yield 7.44%.
Labor Secretary Robert Reich gave conflicting signs yesterday of where the U.S. job market is headed when news wires reported that he said healthy jobs growth is not threatening to ignite inflation, but that a shortage of skilled labor may cause concerns about rising prices.
"We are enjoying a robust jobs expansion, without any signs of inflationary dangers," Reich said in prepared remarks two days before the release of the August payroll figures.
In late trading yesterday, the 10-year note was up 2/32 to yield 7.17%. The seven-year was up 3/32 to yield 6.97%, and the five-year was up 3/32 to yield 6.79%.
At the short end, the yield on the three-month bill was down three basis points to 4.65%. The yield on the six-month bill was down four basis points to 5.03%, and the yield on the one-year bill was unchanged at 5.51%.
The September Treasury bond futures contract ended up 1/4 of a point to 103 23/32.
Top Trader Leaves Bear Steams
J. Patrick Rothstein resigned his position as head government bond trader at Bear, Steams & Co. yesterday.
A spokesman for the firm continued that Rothstein had resigned and said that no replacement had been chosen yet.
A call to Rothstein's home was not returned.
In the corporate bond market, spreads to comparable Treasuries were unchanged in listless trading.
Below-investment grade bonds were mostly unchanged in quiet trading.
Bonds of Orion Pictures Corp. leaped following a merger announcement. The company's 10% bonds due in 2001 improved 25 points to a price of 80 and a yield-to-worst of 14.59%, according to Salomon Brother's daily high yield report.
Orion, MCEG Sterling Inc., Metromedia International Telecommunications Inc., and Actava Group Inc. announced they would merge to form a new company called Metromedia International Group Inc.
Bonds of Waxman Industries Inc. improved several points yesterday after the company reported stronger-than-expected earnings on Tuesday, one portfolio manager said. Treasury Treasury Market YieldsPrevious Previous 5-Month Bill 4.65 4.63 4.406-Month Bill 5.03 5.05 4.861-Year Bill 5.51 5.54 5.312-Year Note 6.13 6.18 5.923-Year Note 6.41 6.45 6.195-Year Note 6.79 6.83 6.687-Year Note 6.97 7.01 6.8510-Year Note 7.17 7.19 7.0730-Year Bond 7.44 7.45 7.37
Source: Cantor, Fitzgerald/Telerate