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Dollar, bonds flatten
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May 20, 1999: 3:31 p.m. ET
Afternoon money markets are quiet as weariness calms even the worst jitters
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NEW YORK (CNNfn) - The bond market limped to the close of another jittery day Thursday, leaving the long bond coasting lower after hours spent negotiating raw nerves, a flat dollar and ambiguous economic data.
Shortly before 3 p.m. ET, the benchmark 30-year Treasury bond had slipped 7/32 of a point in price to 91-31/32. The resultant yield eased to 5.82 percent.
Afternoon activity was light, with few traders finding the motivation necessary to dip back into the market following days of exhausting volatility and interest-rate dread. In the absence of other direction, hedge funds lightened their futures holdings, encouraging smaller traders to take some profits off the table from Wednesday's long bond rally.
However, short-term debt crept higher as traders unwound Wednesday's flight out of rate-sensitive Treasury bills and notes, said Anthony Crescenzi, bond analyst at Miller Tabak Hirsch. Ten-year, five-year and two-year notes were all 1/32 of a point higher in price, flattening the yield spread between the long bond and two-year debt to 48 basis points.
A morning of jitters
News that the number of first-time jobless claims shrank last week to 299,000 from a revised level of 311,000 the week before shook the bond market back to reality following Tuesday's cathartic meeting of the Federal Reserve interest rate committee and the relief rally that followed. Economists had forecast a much smaller decline to 303,000 claims for unemployment benefits.
The jobless report was the first major economic data released since the Fed's Open Market Committee voted to leave rates unchanged, but changed its bias on future decisions to reflect a tightening outlook.
A decline in the number of jobless claims indicates fewer layoffs, a sign that the U.S. labor market is heating up.
In turn, a tight labor market is a negative for bond traders who fear, along with Fed Chairman Alan Greenspan and other economists, that inflation will re-enter the economy in the form of climbing wages. Lower unemployment forces businesses to compete more vigorously for qualified workers, offering higher pay or other compensation to lure or keep employees.
Coming so soon after the Fed announced its shifting bias, the news only highlighted the certainty of rising interest rates ahead. The Fed raises rates in order to fight inflation, but higher interest rates hurt the bond market, particularly shorter-term notes and bills, by making bonds less attractive than savings accounts as an investment.
Greenspan's Thursday comments on the economic status of emerging markets inspired only a brief tremor of preemptive selling in the bond market, but the ripples quickly faded after traders digested the remarks.
Trade gap stays benign
The bond market largely ignored a concurrent report that showed the U.S. trade deficit widening to a record $19.7 billion in March from its previous peak of $19.44 billion in February.
Economists had expected the imbalance between imports and exports to shrink instead, forecasting a deficit of $18.1 billion.
While initially neglected in the face of the jobless data, the news was good for bonds' prospects.
Formerly, only manufacturing and international trade were acting as curbs on otherwise robust U.S. economic growth, encouraging investors to remain in the bond market in the hope that slowing growth will keep inflation in check. However, recent signs of recovery in the manufacturing sector have left trade as the only sustained brake on the economy.
Dollar checks course
The dollar found its own upward momentum sapped by profit-taking and inertia, leaving the U.S. currency only minimally stronger against the yen at 124.32 yen.
The greenback surged nearly a full yen Wednesday as traders came around to the dollar-positive likelihood of rising interest rates on the horizon. In particular, the contrast between rising U.S. rates and their Japanese equivalents, which hover around zero, was a tempting prospect for dollar bulls, who bought heavily in the hope that rising rates soon will render greenbacks more expensive.
Although "Mr. Yen," Japanese Vice-Minister of Finance Eisuke Sakakibara, warned that he is watching the yen's decline carefully, few traders took much heed of his comments, instead hearkening to Bank of Japan Governor Masaru Hayami, who said the yen's losses were "not excessive."
The dollar also edged up against the euro, pushing the European currency down to $1.0632 from $1.0663 the previous day.
Traders blamed the euro's new weakness on the Ifo, a key report on German business sentiment. In April, the Ifo's business climate component slipped to 89.7 from 90.2, indicating a choppy outlook ahead for the German economy, united Europe's largest.
Even though the European Central Bank voted Thursday to keep European interest rates unchanged, the Ifo kept lingering rate worries alive, leading traders to speculate that a fresh round of rate cuts could be inevitable. 
-- by staff writer Robert Scott Martin
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