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Bond Brief: Soft Sell

Updated from 10:56 EDT

Treasuries ended Monday lower as mounting evidence of economic strength worldwide looked set to weigh on the market before readings on non-manufacturing activity and payrolls come out later this week.

A mixed bag of U.S. manufacturing reports brought bonds off their morning lows, with the benchmark 10-year note ending the session down 4/32 to yield 4.87%. Prior to the morning releases, the yield bumped up against 4.90%. Bond prices and yields move in opposite directions.

Yields on the benchmark 10-year note have been near their highest levels since May 2004 after the Federal Reserve raised the benchmark interest rate last week and suggested there are more hikes ahead.

The 30-year bond lost 5/32 to yield 4.90%, after losing as much as 22/32 in morning trading. The two-year edged lower 2/32 to yield 4.85%, and the five-year fell 4/32 to yield 4.84%.

"There's been signs of growth in Europe, which makes an argument for raising rates and pressure the euro, and there is a line of thought that Japan's economic recovery could prove inflationary," says Drew Matus, senior U.S. economist who specializes in fixed-income markets. "The whole world seems to be recovering at the same time."

Treasuries have offered the best return for fixed-income investors compared with the European Union and Japan. Until very recently central banks in both Europe and Japan kept rates at historic lows while the Fed has been raising its target rate for nearly two years in an effort to keep inflation in check.

Recent signs that rates will rise in Europe and Japan could mean a diminished interest rate spread between the U.S. and countries abroad, and then the U.S. would not seem as relatively attractive to these other bonds.

In Asia, bonds fell after a Bank of Japan report showed that companies plan to increase capital spending more than expected, ramping up speculation that the country will have to raise its target rate from 0%. The yield on Japan's benchmark 10-year note jumped by 8 basis points to 1.84%.

And March eurozone manufacturing grew at its fastest rate since September 2000, according to a eurozone manufacturing purchasing managers' indexes that rose to 56.1 from 54.5 in February. Suggestions that an economic recovery is strong could mean more rate hikes in the region.

If foreign investors diversify from the U.S. bond market, that could have a substantial impact now that foreign investors own more than half the Treasury market alone. For example, foreign buying of government debt helps keep long-term rates low and funds our budget deficit.

In the U.S., the Institute for Supply Management said its manufacturing index for last month declined to 55.2 from 56.7. The index was expected to show a gain to 57.5, which would have placed it at its highest level since October. Any number greater than 50 shows expansion, while a number less than 50 shows contraction.

Meanwhile, February construction spending rose a stronger-than-expected 0.8%, vs. expectations for 0.5% growth, as residential spending increased by 1.3% and business investment rose by 0.8%. The January number was upwardly revised to 0.4% from 0.2%.

Michael Cheah, a portfolio manager at AIG Sun America Asset Management, says the expectations for a stronger number than last month generated "a fair amount of negative sentiment" that the market will have to work hard to shake off.

"We're going to trade day to day," says Cheah, as participants look ahead to the ISM services index on Wednesday and the closely watched nonfarm payroll report on Friday. "This week it will be sell first, talk later."

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