Bonds Decline Following Consumer Sentiment, Manufacturing Data

By Yi Ping Ho ,

The bond market weakened for the third straight day Friday as investors reacted to stronger-than-expected data about the manufacturing sector this morning and placed bets that the

Federal Reserve is almost finished cutting interest rates.

The two-year Treasury note, which is most sensitive to changes in monetary policy, was recently unchanged at 99 9/32, yielding 4.246%. Yields and prices move in opposite directions. The 10-year benchmark note fell 7/32 to 97 7/32, raising the yield to 5.373%, while the 30-year Treasury bond lost 14/32 to 95 6/32, with a yield of 5.713%.

"Basically, the market does not expect the Fed to be easing much more in the future," said Joseph Shatz, government bond strategist at

Merrill Lynch

. "We saw signs in economic indicators this morning that basically pointed to the fact the economy may be recovering."

On Wednesday, short-term treasuries fell immediately after the

Federal Open Market Committee reduced the target

fed funds rate by 25 basis points to 3.75% -- the lowest level since May 1994. Dealers said the short end of the bond market sold off, because it had been pricing in the possibility of half-point cut. Treasuries fell yesterday in reaction to the weekly

initial jobless claims report, which came in stronger than expected.

The latest reports could certainly point to a weak economy that's entering a recovery stage. This morning's

Chicago purchasing managers' index, a key report on the manufacturing sector, showed a lesser degree of contraction than in the past. The index, released at 10 a.m. EDT, rose to 44.4 in June from 38.7 in May, the highest reading since December.

Meanwhile, the University of Michigan's

consumer sentiment index was revised upward. The report showed that consumers are more confident about the future, even though they remained concerned about present conditions.

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