Treasuries bounced higher for the third straight day, continuing a rally that began following the release of Friday's November employment report.
A friendly revision to third-quarter
productivity and unit labor cost
figures, as well as a
coupon pass supported the market.
So far, it's been a decent December for Treasuries, with the 30-year yield now 11 basis points below last week's closing high of 6.32%. The 30-year bond rose 22/32 to 98 30/32, dropping the yield 5 basis points to 6.20%.
In recent years, the Treasury market's tendency has been to move higher in the final weeks of the year -- a condition exacerbated by the thin liquidity of dealers paring back trading at the end of the year. The market's steep selloff during the last two weeks of November gave technicians another reason to expect some buying during this month.
"There aren't any major roadblocks now through the end of the year," said Michael Krauss, chief technical strategist at
. "We probably can get the long bond down another five or 10 basis points by the end of the year."
Today's productivity figure acted as the initial catalyst for the upward move. Productivity grew at a 4.9% annual rate during the third quarter, a hefty revision from the
earlier estimate of 4.2%. Unit labor costs, meanwhile, were revised to a 0.2% decline during the third quarter, compared with the preliminary 0.6% increase. The revision is the first decline in labor costs since the second quarter in 1997, when costs declined 0.6%.
There's no doubt that the report is terrific news for the market. The third-quarter revision, though it's a backward-looking figure, continues what Fed Chairman
has called the "Goldilocks" economy: a high degree of productivity and low wage increases holding down inflation. Tight labor conditions suggest that wage inflation should be on the rise, one of the Fed's chief worries in recent months, but it has remained under control.
"When you get these demand bursts you typically get bursts of productivity," said Brian Jones, economist at
Salomon Smith Barney
. "But these bursts are no longer momentary. The momentary bursts have continued."
Jones pointed out that productivity, on a year-over-year basis, is rising at a 3.1% rate, while unit labor costs are rising at just a 1.5% rate. However, he said the fourth-quarter numbers will be particularly important. During the last three years, labor costs have increased significantly in the quarters following a productivity surge.
The day's other major positive event was the coupon pass. The Federal Reserve, through open-market operations, bought approximately $915 million in long-dated Treasuries with maturities from August 2022 to November 2027. This contributed to the rally in the long end of the Treasury yield curve.
"We've been on a little uptrend in the last few days, but if anything got it to pop really good it was probably the Fed coupon pass," said Gib Clark, manager of government trading at
Zions First National Bank
in Jersey City, N.J. "It took a lot of the supply out of the market. The market is kind of thin, and when the Fed went in, it just took up the supply."
Overseas buying from central banks was said to be positively affecting the short end. Several speeches from Fed officials went unnoticed today, including Greenspan's, who didn't remark on the economy or the markets.
Tomorrow afternoon, the Fed's
, an anecdotal account of nationwide economic conditions prepared by the Fed's 12 regional districts, will be released. The Fed uses this (along with a myriad of other data) in determining what direction monetary policy will take at its upcoming meeting. Since most expect the Fed to remain on hold at the Dec. 21 meeting, there's less anticipation for this release than usual.