The June purchasing managers' index came in much stronger than expected yesterday, but Treasury prices gave up only a little ground on the news.

Late in the afternoon, the 30-year bond was off 1/4 point to yield 8.43%.

Analysts and traders said the sell-off was restrained because the market is already anticipating Friday's June employment report. The paralysis that usually strikes ahead of the jobs data is exacerbated by the fact the market is closed Thursday for Independence Day.

In addition, the long end got some support from improved inflation expectations, they said.

The purchasing managers' index jumped to 50.9% in June from 45.4% in May, when the market had expected it to rise only to 46.9%.

Analysts said the report, which showed broad-based gains, confirms that an economic recovery is underway.

This is the first time since May 1990 the index has broken above 50%, the level that defines an expanding manufacturing sector, according to the National Association of Purchasing Management.

"It's perhaps the most solid indication of a firming industrial economy that we've gotten so far," said Stephen Roach, a senior economist at Morgan Stanley & Co.

Mr. Roach said he was particularly impressed with the jump in new orders to 59.1% from 50.6% in May. That is the highest reading for that component in almost three years, and suggests "a solid underpinning to demand growth in the months ahead," he said.

The decline in June inventories to 36.7%, from 37.5% in May, was another good sign, Mr. Roach said.

Some analysts said the increase in the purchasing managers' employment component suggested that Firday's June payrolls data may be stronger than expected.

Elias Bikhazi, a money market economist at Security Pacific National Bank, was forecasting a 30,000 decline in June payrolls.

After seeing the purchasing managers' report, "I'm starting to think the bias is closer to flat," he said.

Traders paid little attention to yesterday's other indicator, the weaker-than-expected May construction spending report.

May spending feel 0.9%, when most economists had been looking for small gains, but the April number was revised up to a 1.2% increase from the 0.8% rise originally reported.

Short-term prices fared the worst yesterday as the surge in the purchasing index suggested the economy is doing so well there is no need for the Federal Reserve to loosen credit.

In addition, the short end came under pressure because the stock

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 5.73 5.69 5.74

6-Month Bill 5.95 6.00 5.96

1-Year Bill 6.35 6.33 6.25

2-Year Note 6.96 6.88 6.78

3-Year Note 7.33 7.38 7.18

4-Year Note 7.50 7.57 7.40

5-Year Note 7.92 7.95 7.79

7-Year Note 8.13 8.17 8.00

10-Year Note 8.24 8.31 8.13

20-Year Bond 8.43 8.51 8.34

30-Year Bond 8.43 8.50 8.37

Source: Cantor, Fitzgerald/Telerate

market reversed its Friday losses and Friday's rumors about banks failed to pan out.

"The short end suffered from losing its flight-to-quality status, as well as from stronger economic data that seemed to suggest an ease was not in the immediate future," said Maureen O'Toole, director of research at Rodman & Renshaw.

As short-term prices wilted, the long end got some support from improved inflation expectations.

The purchasing index's price component rose only a little. That, combined with further losses in commodity prices, suggests inflation rates will continue to improve even though economic activity is picking up.

The Commodity Research Bureau index closed 0.57 point lower, at 207.87.

"The CRB is funny and we all know its weaknesses, but when it dips to four-year lows, that makes an impact," Ms. O'Toole said.

A government coupon trader said short-covering may also have helped prices yesterday, as participants who got stuck with unprofitable short positions when the market rallied Friday took advantage of yesterday's dip to cover their positions.

Traders said activity should remain lackluster today and tomorrow.

"For the most part, retail is where they want to be for the number," a government note trader said.

The coupon trader said he thought participants would finish flattening their positions today, which might push prices a little higher.

A bill trader reported "reasonable demand" for the $20.8 billion of three-and six-month bills the Treasury auctioned yesterday. The new three-month bills were sold at a rate of 5.59%, and the six-months came at 5.71%.

Overnight in Tokyo and London, long-term prices improved a little on the news of the Japanese rate cut.

The Japanese move "basically meant a firmish tone in Europe, although people weren't rushing away with all the securities they could find," a London dealer said.

The Bank of Japan said it was cutting its discount rate by 50 basis points to 5 1/2%. The rate had stood at 6% since Aug. 30, 1990.

In Tokyo, stocks and bonds soared, with the Nikkei up 817.80 points to 24,108.76 and the 10-year Japanese government bond closing 0.67 point higher to yield 6.73%, down 12 basis points from Friday's close.

Kathleen Stephansen, an economist at Donaldson, Lufkin & Jenrette Securities Corp., said the timing of the move was a little surprising.

Japan is "coming off very strong first-quarter growth," she said. "And inflation, though it is subdued, is at the higher end of what the Bank of Japan would feel comfortable with."

The September bond future contract closed 1/8 lower at 93 16/32.

In the cash market, the 30-year 8 1/8% bond was 3/16 lower, at 96 17/32-96 21/32, to yield 8.43%.

The 8% 10-year note feel 5/32, to 98 7/32-98 11/32, to yield 8.24%.

The three-year 7% note was down 3/16, at 99 2/32-99 4/32, to yield 7.33%.

Rates on Treasury bills were higher, with the three-month bill up two basis points at 5.58%, the six-month bill up two basis points at 5.71%, and the year bill five basis points higher at 5.99.

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