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Bond traders resumed buying of U.S. Treasury securities on Thursday, with some finding the higher yields (and lower prices) difficult to resist, while others were squaring their end-of-month positions. A smaller group may be anticipating a weaker-than-forecast second-quarter Gross Domestic Product (GDP), due out on Friday. Whatever the reasons on this low-volume day, prices of Treasuries posted hefty increases, sending their yields, which move in the opposite direction of prices, down. Heavy buying, particularly of short-term T-bills and notes, has flattened the yield curve, e.g., the difference between the yield on the 10-note and the 2-year note is only 24 basis points. In prior times this curve flattening (and ensuing inversion) has preceded recession, although most analysts are refuting that possibility. Although yields did slide today, it had no effect on mortgage rates, which remained at previous levels. Treasuries sold at opening in response to a report on first-time employment claims that fell short of forecasts. For the week ended July 22 claims rose by 5,000 to 310,000 when a jump to 317,000 was expected. However, the four-week average that smoothes volatility edged down to 318,250 from 318,500 the previous week. Continued claims - those collecting benefits for more than one week - climbed to 2.6 million.

Good Earnings, Strong Economic News Boost Equities

Stocks posted another round of gains on Thursday, with the Dow Jones Industrials passing the 10,700 mark and the Nasdaq Composite and S&P 500 hitting fresh four-year highs - their best marks since June 2001. The expectation of strong earnings paired with reality, have rallied stocks for the better part of July. During the month the Dow rose almost 400 points or 3.79 percent, while the Nasdaq composite added 6.85 percent. The benchmark S&P 500 posted a 4.06 percent.

Dow component Exxon began the day by reporting earnings that were up from last year, but 1 cent shy of forecasts. This disappointed investors who made only small buys today in spite of the fact that the company reported profits of $8.7 billion. Caterpillar was the biggest gainer, adding more than 3 percent. It was followed by Honeywell, which gained 2.6 percent thanks to an upgrade. Another eight components were up more than 1 percent on the session. Of the five components that closed negative, AIG and Hewlett-Packard were the only two to shed more than 1 percent. A sharp rise in oil prices might have kept a lid on some gains as oil closed just below $60 a barrel due to supply concerns.

Other big moves in the equity markets included an almost 10 percent gain by Daimlerchrysler when it was announced that its embattled CEO is stepping down. And good reports from number of pharmaceuticals boosted the Amex drug index. Starbucks just keeps growing, adding 4.7 percent today on stellar earnings. The tech bellwethers did not reflect the gain in the Nasdaq, as only five of the 11 closed in positive territory. Of those making gains, only Intel and Ericsson added more than 1 percent. JDS Uniphase slid 3.2 percent, making it the only bellwether to lose more than 1 percent.

At closing: The Dow 30 Industrial Index rose 68.46 points or 0.64 percent to10,705.55; the Nasdaq Composite index was up 12.22 points or 0.56 percent at 2,198.44, and the benchmark Standard & Poor's 500 Index gained 6.93 points or 0.56 percent to close at 1,243.72.

The 30-year Treasury bond was up 1-5/32 in price with the yield falling to 4.40 percent versus 4.47 percent at Tuesday's close.

The 10-year Treasury note was up 15/32 in price with the yield falling to 4.19 percent versus 4.25 percent at Tuesday's close.

The 5-year Treasury note was up 7/32 in price with the yield falling to 4.04 percent versus 4.09 percent at Tuesday's close.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.605 percent from 5.599 percent at Tuesday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.198 percent from 5.185 percent at Tuesday's close.

Coming Up

The all-important advance look at second-quarter GDP will come on Friday. While analysts are predicting the economy to grow at 3.5-percent, which is below first-quarter growth of 3.8 percent, there are whisper numbers lower than that. In addition, the Employment Cost Index (ECI) for the second quarter will be released, with forecasts for a 0.9 percent increase -- slightly higher than the 0.7 percent registered in the first quarter. The ECI is closely watched for signs of inflation with regard to compensation, as it tracks salaries, wages and benefits paid to employees. Also due is the University of Michigan final July consumer sentiment survey, which is expected to be unchanged from the preliminary reading of 96.5. The Chicago Purchasing Managers Index on Business Conditions also is on tap and often provides clues as to the outcome of the ISM index, which is due Monday.

If the reports come stronger or weaker than expected, Treasuries could move accordingly. But if the economic news is on target, Treasury yields would likely hold close to present levels. The dip in Treasury yields today should not have a major impact on mortgage rates unless it is coupled with additional declines on Friday.

Carolyn Siegel

carolyn@interest.com

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