Bonds Slammed by Europeans and the NAPM

Weakness in European bonds and strength in the Purchasing Managers' Index are combining to knock Treasuries down.
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The bond market's in a world of hurt this morning, as traders have sold on more strong economic data and weakness in overseas bond markets. Yesterday's rally, which followed the

Federal Reserve's

surprising decision to shift into neutral after its expected quarter-point interest rate hike, was washed away entirely.

Today's most damaging economic release was the June

National Association of Purchasing Management

survey of manufacturing sentiment, which rose to 57, up from 55.2 in May. The 30-year bond, already down almost a point, was down 1 18/32 just after the NAPM's 10 a.m. EDT release. Of late, the 30-year Treasury bond's price was down 1 1/32 to trade at 88 31/32. The yield rose 8 basis points to 6.05%.

NAPM officials said if this figure were the annual average, it would correspond to a 4.7% annual rate of GDP growth. This isn't a good start for those in the bond market hoping the Fed's satisfied with one rate hike -- the Fed raised the fed funds target yesterday to 5% chiefly because it's worried that this pace of growth is unsustainable without causing inflation.

"It's hard to imagine the Fed sitting idly by if the economic figures were to continue to come in with this strength," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "It would smack of complacency, if the figures were to come in like this through to the next meeting."

Several components of this report are cause for concern for the bond market and the Fed. A reading greater than 50 indicates expansion in the manufacturing economy. The new orders index rose to 61.7 from 58.9, an indication that demand is strong, which will fuel production in the future. The employment component fell to 51.9 from 53.5, but Crescenzi said the fact that this component has breached 50 for two months straight after 11 straight months of contraction means tomorrow's

employment report

could show growth in manufacturing payrolls for the first time in eight months.

'It's hard to imagine the Fed sitting idly by if the economic figures were to continue to come in with this strength,' Miller Tabak's Tony Crescenzi said. 'It would smack of complacency, if the figures were to come in like this through to the next meeting.'

"The odds are, it's going to be captured in tomorrow's number and give us another strong report," Crescenzi said. "If there are more manufacturing jobs in the mix it will lift the wage tally, because they're higher-paid jobs."

Joseph Abate, economist at

Lehman Brothers

, disagrees, citing the decline in the component, and the fact that manufacturing lost 45,000 jobs last month as evidence that employment in this sector isn't recovering.

"The strength in manufacturing does appear productivity-driven," he said.

Regardless of the NAPM, the bond market was already in a bad mood this morning. European bond markets sold off on the back of weakness in the euro, and the Treasury market was getting tagged in tandem. The euro was lately trading at $1.0233, down from the overnight high of $1.0396.

"The spark emanated from Europe," Crescenzi said. "The dollar is up, which is more positive for U.S. Treasuries, but the knee-jerk reaction is to trade Treasuries down too."

Many felt the Fed would retain a bias toward tightening interest rates, despite the fact that the Fed shifted to neutral following each tightening taken in 1994. But the Fed didn't disclose the bias until the following meeting -- and analysts felt this time would be different. The Fed's three rate cuts last year were undertaken in response to a global liquidity crisis, and Crescenzi said the Fed probably didn't want to give an indication as to whether it'll raise rates "when it could prove disruptive to the world stage."