Yesterday's national purchasing managers' report showed the economy took a turn for the better in May, and the news caused a wave of selling that pushed Treasury prices lower.
Late in the day, the 30-year bond was off 3/4 point to yield 8.33%.
Prices began to decline overnight in London and Tokyo on follow-through selling from Friday, when the market sold off on a big gain in the Chicago purchasing managers' May index.
When the Detroit purchasing index was released early yesterday morning, Treasury prices deteriorated even more, since the Detroit index jumped to 47.9% in May from 42.8% in April.
The Detroit report increased the market's fears of a very strong national purchasing managers' number. But by the time the national report came out at 10 a.m., eastern daylight time, its positive news about the economy was already accounted for in Treasury prices and the market held its ground, although prices did drift lower during the afternoon.
"The market just started out with a weak tone and traded lower all day long," a note trader said, adding that the declines were led by
Treasury Market Yields
Monday Week Month
3-Month Bill 5.74 5.55 5.59
6-Month Bill 5.96 5.85 5.82
1-Year Bill 6.25 6.07 6.10
2-Year Note 6.78 6.64 6.79
3-Year Note 7.18 7.04 7.07
4-Year Note 7.40 7.28 7.31
5-Year Note 7.79 7.66 7.64
7-Year Note 8.00 7.90 7.88
10-Year Note 8.13 8.05 8.02
20-Year Bond 8.34 8.28 8.21
30-Year Bond 8.33 8.28 8.20
Source: Cantor, Fitzgerald/Telerate
selling in short-term and intermediate notes.
The signs of an economic recovery suggest the Fed will not need to ease again, which makes short-term paper less attractive.
"There was a respectable amount of retail selling, more than the Street was able to absorb," another note trader said.
The national purchasing manager's index rose to 45.4% in May from the 42.1% reading in April, passing the key 44.0% level that the purchasing managers' association says shows the economy has begun to recover.
"At 44%, the manufacturing sector is still declining, but the economy as a whole is no longer declining," said Eveline Tainer, senior domestic economist at the First National Bank of Chicago. "At 50%, you have increases in both the economy and the manufacturing sector."
Michael Niemira, a business economist at Mitsubishi Bank, said the 44% level was sometimes a leading indicator in previous business cycles, coming a month or two before the actual trough.
In any case, "it seems to be suggesting the turn is at hand," Mr. Niemira said. "Whether it's this month or next month or last month doesn't matter. What we need to see is confirmation from other indicators."
Economists said the surge in the report's new orders component was also promising. New orders, which are the most forward-looking part of the report, rose to 50.6% in May, the highest reading since last June, and up from 45.9% in April.
Mr. Niemira said planned increases in auto production may be serving as one of the catalysts for the economy's recovery and the rise in new orders may reflect the car companies' orders for materials they need to increase output.
Auto companies plan to boost production to a 6.6 million annual rate in the third quarter, up from an estimated 5.1 million pace during this quarter, Mr. Niemira said. "If you do notch up production by 1.5 million units, that has a substantial ripple effect on the economy."
Although the overall index and new orders were positive, other components of the report, such as employment and inventories, were "mediocre," Ms. Tainer said.
Mr. Niemira said it was not surprising that employment would lag, since "you have to see orders start coming through, you have to see production come back, before business start saying, 'let's hire again.'"
At the same time the national purchasing managers' index was released, the Commerce Department reported stronger-than-expected May construction spending figures.
Construction spending rose 0.8% last month, when the consensus forecast was for a small decline. But the increase was partly offset by some deterioration in March, where the 1.5% decline reported last month was revised down to a 2.1% drop.
Ms. Tainer said the construction spending number seemed peculiar because the residential component fell, despite the improvement in housing starts seen in recent months, while nonresidential spending rose 4.4%, even though that sector is overbuilt.
The note trader said he thought current price levels represented a buying opportunity and he predicted the market would bounce a little today.
But participants will be wary of the 10-day car sales figures. Ten economists surveyed by The Bond Buyer expect car sales for late May to come in at a 5.8 million annual rate, unchanged from the mid-May level.
"It'll matter if they're higher," another trader said. "Any little bit of data that shows strength in the economy causes people to get nervous and hit bids."
September became the lead month for the bond futures contract yesterday, and the September contract closed [sup.23]/32, to lower, at 94 8/32.
In the cash market, the 30-year 8 1/8 bond was 27/32 lower, at 97 17/32-99 2/32, to yield 8.33%.
The 8% 10-year note fell 19/32, to 98 30/32-99 2/32, to yield 8.13%.
The three-year 7% note was down 5/16, at 99 14/32-99 16/32, to yield 7.18%.
Rates on Treasury bills were higher, with the three-month bill up six basis points at 5.59%, the six-month bill up five basis points at 5.72%, and the year bill nine basis points higher at 5.90%.