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Bond Brief: Pre-Minutes Rally

The ISM report gives a lift to Treasury prices ahead of the key FOMC minutes for December.

Treasuries rose across the curve Tuesday on a weaker-than-expected manufacturing report as traders awaited the release of the minutes of

Federal Open Market Committee's

Dec. 13 meeting.

After sitting virtually unchanged all morning, the benchmark 10-year note was recently up 10/32 to yield 4.35%, down from 4.39% Friday. The bond market closed early Friday afternoon and remained closed Monday in observance of the New Year's holiday.

The 30-year bond added 11/32 to yield 4.51%, down from 4.54% in the previous session. Bond prices and yields move in opposite directions.

In shorter-dated debt, the two-year gained 2/32 to yield 4.35% and the five-year added 6/32 to yield 4.31%.

Traders will scour the minutes from December's Fed meeting for any hint that the central bank will raise rates beyond its next two policy meetings.

"If they reiterate what we know, I think we'll probably get a little bit of a rally in the afternoon," said Randy Diamond, equity sales trader at Miller Tabak & Co.

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Yields on interest rate futures have priced in a 90% chance that the central bank will raise the fedl funds rate target to 4.5% at its Jan. 31, meeting, and a 60% chance for an increase to 4.75% at the next meeting on March 28.

With the spread between the two- and 10-year yields near zero and the 10-year yield below where the target rate is expected to hit this spring, the market will be sensitive to any hawkish language.

Any evidence that the Fed is not done tightening could spark another yield-curve inversion, but Diamond said it's too early to tell whether that inversion would be lasting or meaningful.

"For now, we could see a small inversion again, but we have a few weeks until the next FOMC meeting and more guidance on where

the Fed will take rates," he said.

The bond market got a lift from morning economic reports that some interpreted as evidence that the Fed can ease off the brakes.

The Institute for Supply Management's manufacturing index for December fell 3.9 points to 54.2 -- a four month low -- vs. expectations for a dip to 57.5.

The report, which provides a forward view of actual orders and production, also showed that the prices paid index fell to 63 from 84 in October.

Separately, November construction spending rose just 0.2%, vs. expectations for a 0.7% rise. Residential spending came in flat, the weakest month since the segment declined in June, weighing on gains made in business and public spending.