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Bond cautious before auction
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May 11, 1999: 9:18 a.m. ET
Looming 5-year note sale, productivity data keep debt trading exploratory
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NEW YORK (CNNfn) - The bond market put its best foot forward Tuesday ahead of a key labor report and the Treasury Department's sale of $15 billion in new 5-year notes, while a strong dollar provided support.
Shortly before 9 a.m. ET, the benchmark 30-year Treasury bond floated up 2/32 of a point in price to 92-13/32, pushing the yield down to 5.78 percent.
Traders said that the gains lacked conviction, but the market wasn't especially dreading the afternoon's refunding auction, the first of two consecutive note sales this quarter. On Wednesday, the Treasury will auction $12 billion in 10-year notes.
In both sales, the debt will sell at a single high-bid price, an uncommon procedure for long-term Treasury auctions, which are usually handled in the "Dutch" format. In a Dutch-style auction, debt is parceled out to buyers starting from the high bid and continuing to the next-highest bid, until all available securities have been distributed.
Last quarter's quarterly refunding received strong interest from institutional investors, but lackluster retail interest left many bond dealers demoralized and holding the bulk of the auction's $35 billion in fresh paper.
Watching workers' efficiency
Before the auction, most retail bond traders will await the Labor Department's release of preliminary first-quarter productivity data at 10 a.m. ET.
Federal Reserve Chairman Alan Greenspan has repeatedly made clear that he views wage inflation as the U.S. economy's weak link, through which inflationary pressures eventually will creep back into the economy.
Because productivity measures the efficiency of U.S. workers, it is a key indicator of the ability of businesses to grow without having to hire and pay more people. In the tight labor market, this power to avoid expanding payrolls allows employers to avoid competing too heavily for qualified workers, ensuring that salaries stay on an even track.
However, economists predict that productivity slowed its rate of increase in the first quarter to 3.0 percent from a soaring increase of 4.6 percent in the fourth quarter. Unit labor costs, a finer indicator of wages and other employment costs, are expected to climb 0.5 percent, from a decline of 1.1 percent in the previous quarter.
Inflation is a negative factor for bonds, as it depresses the real value of the fixed returns they offer investors. Moreover, Greenspan is the chief arbiter of U.S. interest rate policy, and signs of wage inflation could make him more willing to raise rates when he next meets with the Federal Open Market Committee next Tuesday.
Dollar advances
The dollar was back on the bullish side in early U.S. trading, forcing the yen back in the absence of yen-positive comments from Japan.
Instead, former Federal Reserve Governor Wayne Angell boosted the dollar by telling Reuters new agency he found an exchange rate of 140 yen to the greenback more appropriate.
The dollar edged up to 121.07 yen, well above its previous U.S. close of 120.7 yen.
The euro, meanwhile, retreated after NATO forces continued bombing Yugoslav positions, even though Yugoslavia had announced it will withdraw some of its troops from the breakaway province of Kosovo.
On Monday, the euro had firmed on hopes for peace in the Balkans, but the continuation of military action undid all the gains, leaving the European currency at $1.0729. 
-- by staff writer Robert Scott Martin
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