Bonds Sell Off Early but Recover on NAPM Report

The purchasing managers' report came in roughly in line with expectations, and that has moved the bond back closer to break-even.
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The market resumed its downward spiral this morning, selling off on hawkish remarks by



Laurence Meyer

last night. But Treasuries have staged a steady recovery since the release of the

National Association of Purchasing Management's

manufacturing index, which fell slightly in November.

The NAPM, a widely followed survey of nationwide manufacturing conditions, fell to 56.2 in November from 56.6 in October. That's about on target with economists' expectations for a 56.3 reading, as polled by


. A reading greater than 50 indicates expansion in the manufacturing sector; less than 50 indicates contraction. Most components were down in November, including the important prices paid index, which measures what producers are paying for materials. Prices paid fell to 65.3 from 69.4 in October.

That's helped bond yields fall from their highest level of the day. At one point the 30-year bond yield rose to 6.35%, not far off the year's 6.40% high, but lately was just 2 basis points higher to 6.30%. The price of the bond fell 4/32 to 97 22/32.

"The market was afraid there'd be a little more price momentum in the report, so all in all, not bad," said Charlie Reinhard, chief market strategist for

ABN Amro Futures

. However, the steady strength displayed in the report means that the risks "are still toward more

Fed tightening rather than easing as their next course of action."

Those risks were clearly detailed by Governor Meyer,

speaking late yesterday at

New York University

. Among Fed governors, Meyer's generally considered a hawk, meaning he tends to advocate a more restrictive monetary policy. He's keen on tried-and-true models that currently make him uncomfortable with the low unemployment rate and the current pace of growth, because he believes it will ultimately lead to wage inflation.

"He's not always a hawk -- he reflects what the models are telling him," said Reinhard. "He's one of the more quantitative Fed members, and he's concerned about inflation pressures. Unlike energy prices, which have routine 40% rallies and selloffs, wage increases are less ephemeral. They can't be reversed easily."

Meyer yesterday said he can't deny that there's been an increase in productivity, but he doesn't necessarily think that will head off inflation because it could ultimately result in even more consumer demand. He doesn't believe the tight labor market can sustain the economy's current output, and said: "We cannot, in my view, afford to withdraw entirely from a forward-looking policy."

Other economic releases didn't provoke much reaction from the market today.

Construction spending

rose 0.3% in October, but September's figure was revised to a 0.1% decline from a 0.5% increase. The

Conference Board's

index of

leading economic indicators

was unchanged in October after a 0.1% decline in September.