Bond prices are down sharply again this morning after the release of a strong report on the state of the manufacturing sector. But the bulk of the downdraft happened before the 10 a.m. EST release of the

Purchasing Managers Index

, in anticipation of an impressive report, and traders took the additional weakness the report caused as an opportunity to buy.

"People are looking to use the downdraft on strength to buy ahead of what's expected to be a weak

employment report

and ahead of a long weekend with the Kosovo situation worsening," said Michelle Laughlin, Treasury market strategist at

Prudential Securities

. "People would rather be long than short; there's certainly not much appetite to be short in this environment."

The benchmark 30-year Treasury bond lately was down 24/32 at 93 27/32, lifting its yield 5 basis points to 5.68%. Continuing a recent trend, shorter-maturity notes were outperforming the bond, causing additional steepening of the yield curve. With the two-year Treasury note lately down 2/32, the difference in yield between it and the long bond had widened to 65 basis points from 64 yesterday. A steepening yield curve reflects growing concern about inflation.

The Purchasing Managers Index, which indicates growth in the manufacturing sector when it's over 50 and contraction when below 50, rose to 54.3 in March from 52.4 in Feburary. That's its second consecutive over-par reading after eight months below the break-even line.

The reading was stronger than the average forecast of 51.9 among economists surveyed by

Reuters

, but the forecast, published on Monday, ceased to mean much

yesterday, when the

Chicago Purchasing Managers Index

, a regional version of today's report, blew by the consensus estimate.

"The headline figure was a little bit stronger than consensus, but it's hard to get a read on what the new consensus was because people revised up after the Chicago report," said David Ging, Treasury market strategist at

Donaldson Lufkin & Jenrette

.

As for the details of the report, a sub-index measuring prices paid by manufacturers experienced a fairly sharp rise from 35.9 to 43.2, reflecting the run-up in oil prices since mid-February. But it wasn't as sharp as yesterday's increase in the Chicago report's prices paid index, so the reaction to it was fairly muted.

And the employment sub-index, while it rose, remained below the break-even line, quelling fears that tomorrow's March employment report will include the first expansion in manufacturing payrolls in seven months.

Ging also expects at least a partial recovery by the end of the trading session. "We think the market is actually in a bottoming process and that the medium-term trend" -- over the next month or two -- "is back to the upside, so I think we're going to see buying on dips," he said.

Part of the reason is seasonal. Japan begins a new fiscal year today, bringing its traders back into the game, and the Treasury will once again pay down a large amount of its debt during the second quarter thanks to surging tax revenues. The long bond's yield has peaked in April for each of the last two years.

But also, Ging said, the bond market's relatively muted reaction to the more than 40% increase in oil prices over the last six weeks may indicate an expectation that oil prices will soon reverse course for demand-side reasons. "I think the market's anticipating a slowdown in the economy," he said.