Treasury market players remained mostly on the sidelines Friday in anticipation of a possible tightening of monetary policy this week.
The negative sentiment was heightened Friday by rising gold prices and supply concerns ahead of this week's two-year and five-year note auctions, traders said.
Prices on the 30-year Treasury bond ended the session down nearly 1/8 point to yield 7.78%. As with much of the action last week, Friday's trading was dominated by ongoing concern about whether the Federal Reserve will move to tighten monetary policy at its Federal Open Market Committee meeting tomorrow, or soon thereafter.
"The market can take another [Federal Reserve] tightening," said one government trader, noting that bonds rallied after the last two moves. "What the market can't take is the uncertainty of whether or not the Fed Will tighten. Uncertainty almost always leads to lower prices."
A survey of economists and Fed watchers reveals no consensus on what tomorrow will bring.
Last week, some big names, like Wayne Angell, chief economist at Bear Steams & Co., and Robert Giordano, Goldman Sachs & Co.'s top economist, were saying a 50-basis-point tightening in the federal funds and discount rates is likely to emerge from tomorrow's FOMC meeting. And market players have clearly priced in such a move, selling out of the short end of the curve last week in anticipation.
Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., agrees.
"It's not a complete given, but I think the data we've gotten recently -- particularly the capacity utilization number -- will push the Fed to move sooner than later," Schaja said.
While expectations for a tightening before yearend are nearly unanimous, many economists and Fed watchers believe that a Fed move next week is anything but certain.
Most who believe the Fed will wait note that the September employment and retail sales figures will not be released until Oct. 7 and Oct. 14, respectively. The Fed might not be able to generate support for a 50-basis-point move without the September employment and retail sales information -- and has, according to some observers, abandoned 25-basis-point moves.
In addition, when the Fed last tightened in August, it clearly implied that it would hold off on another move for some time. The Fed's next scheduled meeting after tomorrow is Nov. 15, raising the possibility of either an intermeeting move or continued uncertainty until November.
Based on comments made by Fed chairman Alan Greenspan in congressional testimony last Thursday that the pace of economic slowdown is unclear, Waldo T. Best, economist at Barclays de Zoete Wedd Securities Inc., believes there will be no Fed action on Tuesday.
Greenspan is "waiting for more information," Best said. "He'll come out of [Tuesday's] meeting with the authority to tighten but will wait for the September payroll data and tighten shortly after."
The Fed will not wait until its next meeting on Nov. 15, Best said, because by then it will look like the central bank is "chasing inflation."
"I think the Fed only has a 40% probability of moving [this week]. The odds are weighing in favor of a November change," said Anthony Chan, chief economist at Banc One Investment Advisors. "I don't think the very strong capacity utilization is going to move the Fed to change policy without firmer labor market growth."
Chart noted that the August employment numbers were the year's weakest.
Although all eyes will be on Tuesday's FOMC meeting, there is a bevy of economic reports due out this week.
Today brings existing home sales for August, which are expected to dip slightly to about 380,000 annualized.
In addition to the FOMC meeting, Tuesday's docket includes the $17.25 billion two-year note auction, the Conference Board's September index of consumer confidence, and the Johnson Redbook's estimate of retail store sales for September.
The Treasury's monthly Dutch auction of five-year notes is Wednesday, as is an advanced report on durable goods orders for August.
Thursday brings the second revision of second quarter gross domestic product and new home sales in August.
Friday, personal income and consumption figures for August and the September Chicago purchasing managers report will be released. Friday is also the U.S.-imposed deadline for progress in the trade talks with Japan.
In the secondary market for corporate securities on Friday, spreads of investment-grade bonds were unchanged to as much as 1/8 point wider in sympathy with Treasuries while high-yield bonds ended mixed.
Much of the corporate market's attention this week will be focused on Baltimore, Md., where the much ballyhooed case of a group of bondholders versus Marriott Corp. begins today.
Led by PPM America Inc., a Chicago-based investment firm, the plaintiffs are suing Marriott Corp. in federal court for $30 million, claiming the hotel chain committed fraud when it issued $400 million of new bonds in April 1992.
PPM and other investors claim that Marriott issued Series L and Series M bonds that spring even though plans for a major capital restructuring were underway.
When Marriott announced that it was splitting the company's real estate holdings from its hotel business in October 1992, the Series L and Series M bonds tumbled by as much as 30% in value.
The plaintiffs' lawyer, Lawrence Kill of Anderson, Kill, Olick & Oshinsky in New York, was quoted in the Sept. 26 issue of the National Law Journal that the restructuring "was considered at the highest level of management before the [initial public offering] bonds were sold and Marriott had a duty to at least tell the investing public that they were considering splitting the company."
Starting today, it will be up to a jury to decide whether or not that is true and whether Marriott bondholders deserve compensation.