Treasuries Rise After Weak Manufacturing Data
(Updated from 11:42 a.m. EDT)
Treasuries rose after getting wind of the latest
employment report and more negative news on the manufacturing sector.
The
unemployment rate
, which was expected to climb in May,
actually fell to 4.4%. It had been expected to rise to 4.6% from April's 4.5% rate. But the number of
nonfarm payrolls
dropped by 19,000 last month, which was higher than the expected loss of 17,000 jobs, according to the
Labor Department
report released this morning.
"The headline number was better than expected, so the market fell immediately," said Avram Altaras, managing director of Treasuries at
Bear Stearns
, noting that the short end of the market was hurt the most by the initial release of the employment report.
By midmorning, however, investors were putting their money into both ends of the Treasury market. "Taken collectively together,
the reports continue to paint a picture of an economy that's relatively weak," said William Hornbarger, fixed income strategist at
A.G. Edwards & Sons
. "The employment number was higher than expected, but the reality is, it was still a very weak report.
The purchasing managers index, in particular, was not very promising, and that's why bonds have caught this very nice midmorning bid."
The
National Association of Purchasing Management
this morning said its
PMI fell to 42.1 in May, lower than it was in April and firmly below the 50 reading that signals contraction in the sector.
The two-year note, which tends to rise when expectations grow for more interest-rate cuts and fall when expectations decline, was recently up 1/32 to 100 3/32, lowering its yield to 4.192%. It had fallen after the jobs report came out but regained some ground after the manufacturing data was released at 10 a.m. EDT.
Treasuries had rallied strongly leading up to the jobs report in anticipation of weak data, which would have allegedly encouraged the
Federal Reserve to cut rates for a sixth time this year. The July
fed funds futures contract, a measurement of the bond market's expectations for continued rate cuts, continued to price in about a 90% chance of a 25 basis-point rate cut when the central bank next convenes on June 26-27. The market has been pricing in no additional easing after the June meeting, and that hasn't changed.
Longer-dated Treasuries were also gaining. The
10-year benchmark note was recently 9/32 higher to 97 12/32, yielding 5.347%. And the long bond, as the 30-year Treasury note is called, gained 26/32 to 95 13/32, lowering the yield to 5.696%.
The short end of the bond market has been outperforming the long end, which has been registering growing concern about the possibility of inflation. The bond market is a good gauge of investors' expectations for the economy, and longer-dated securities are a reflection of inflation expectations. Investors decide how much to pay for a given bond based on how much they expect inflation, or higher prices, to erode the value of those fixed payments. The higher their expectations for inflation, the less investors will pay for bonds.
Rising prices show that the bond market's concerns about inflation are dissipating. "Inflation is now not as much of a concern," Hornbarger said. "Bonds have been fighting inflation in recent weeks, and now
the data takes the idea off the table that the Fed should be over with its easing."