Most Prices End With Small Gains Despite Sell-Off on Purchasing Data

Most Treasury prices managed to close with small gains yesterday after recovering from a morning sell-off on the stronger-than-expected purchasing managers' report.

Late in the day, the 30-year bond was up 1/8 point and yielded 7.79%.

Traders said the market's recovery showed the increase in the purchasing index had not dented the bullish sentiment that has ruled the bond market recently.

But most participants expect trading to quiet down today and tomorrow ahead of this week's key number, Friday's September employment report.

"Everyone's in a wait-and-see mode until Friday," said Kevin Flanagan, an economist at Dean Witter Reynolds Inc.

There is a widespread belief that the Federal Reserve will ease monetary policy again if the September employment report is weak, and that expectation has fueled steady buying of short-term and intermediate Treasury paper since the last Fed ease on Sept. 13.

Prices traded higher in overseas trading yesterday, with good buying of intermediate securities reported in Tokyo.

The market held those gains until the September purchasing managers' report and July construction spending both posted small gains instead of the small decreases the market had expected.

The National Association of Purchasing Management reported its September index came in at 55%, up from 54.8% in August. Economists had expected the September reading to slide to 54%.

Analysts said the purchasing managers' report contained little news, since it is well known that U.S. manufacturing is on the mend.

"The manufacturing sector is still moving in a forward direction," Mr. Flanagan said. "Whether or not that will pull services along with it, we'll find out."

The improvement in the September index reflected gains in the survey's employment, inventory, and price components. Traders were particularly worried by the jump in September prices to 48.9%, from 44.9% in August, and by the 48.3% reading for September employment, up from 45.5% in August.

But analysts said even with yesterday's increase, the employment component is consistent with forecasts that Friday's September non-farm payrolls figure will show only a small increase.

Also yesterday morning, August construction spending rose 0.3%, when economists had forecast a 0.4% decline.

All the strength was in residential construction, and Mr. Flanagan said that was the best possible news for the economy, since people who buy new homes usually end up buying some durable goods as well.

Earlier yesterday morning, the Treasury market ignored the August index of leading indicators, which came in flat, following six months of increases.

"Given that a lot of the big declines were in the variables that have to do with manufacturing orders and that they were up dramatically in July, one should look at the average of the two months," said Joan Schneider, a money market analyst at Continental Illinois.

Since the leading indicators rose 1.2% in July, averaging the two months would result in a 0.6% increase, "which is about what leaders have been doing," Ms. Schneider said.

Long-term prices sold off sharply after the purchasing managers' report came out, and the short end weakened a bit at midday when the Fed failed to signal any change in monetary policy.

The Federal Open Market Committee met yesterday, and some participants thought it was possible the policymakers might vote to ease immediately.

Investors continue to extend the maturity of their holdings, but only out as far as seven years, and traders said yesterday that limit has resulted in some bargain paper out past 10 years.

"A lot of the stuff in off-the-run bondland is extremely cheap," a government bond trader said. He cited the 12s of 2013, which are callable in 2008 and currently yield 45 basis points more than the 10-year.

Bullish numbers Friday might be the impetus to push investors further out the curve, the bond trader said.

The December bond future contract closed 1/32 higher, at 100 1/32.

In the cash market, the 30-year 8 1/8% bond was 1/8 higher, at 103 22/32-103 26/32, to yield 7.79%.

The 7 7/8% 10-year note rose 5/32, to 102 31/32-103 3/32, to yield 7.42%.

The three-year 6 7/8% note was up 1/16, at 101 22/32-101 24/32, to yield 6.19%.

Rates on Treasury bills were mixed, with the three-month bill down one basis point at 5.10%, the six-month bill off two basis points at 5.13%, and the year bill steady at 5.12%.

Table : Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 5.23 5.32 5.47

6-Month Bill 5.33 5.44 5.58

1-Year Bill 5.39 5.50 5.58

2-Year Note 5.97 6.11 6.29

3-Year Note 6.19 6.35 6.63

4-Year Note 6.38 6.55 6.76

5-Year Note 6.87 7.05 7.29

7-Year Note 7.21 7.34 7.62

10-Year Note 7.42 7.55 7.78

20-Year Bond 7.69 7.81 7.97

30-Year Bond 7.79 7.89 8.03

Source: Cantor, Fitzgerald/Telerate

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