Bonds Stage Comeback After Overnight Throttling

After enduring a further selloff this morning on asset allocation, bonds are rebounding on the moderate NAPM report.
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The Treasury market has been feeling the pain from all sides of late -- the dollar is struggling, foreign bond markets have been selling and economic data point to higher lending rates. But this morning, the economic data were benign enough to offset all other factors, and bonds have rebounded from an overnight trashing.

A weaker-than-expected

National Association of Purchasing Management

report reversed the damage done in the European and Asian markets overnight. The NAPM report, a survey of nationwide manufacturing sentiment, fell to 53.4 in July after reaching 57 in June, its highest level since July 1997 (NAPM figures above 50 indicate expansion).

The 30-year Treasury bond, down almost a point before the 8:20 a.m. EDT futures open in the U.S., was lately off 2/32 to trade at 88 9/32. The yield on the bond was unchanged at 6.11%.

The market "seems to be expressing some relief over the Purchasing Managers' Index, that it wasn't worse than last month," said Jim Kochan, senior bond market strategist at

Robert W. Baird

. "It seemed to me to be a mixed report, though."

Important components of the report, such as employment, decreased in July, to 49.6 from 51.9, and new orders fell to 54.4 from 61.7. Meanwhile, prices paid, a measure of what producers are paying for materials, rose to 54.7 from 53.5.

Kochan believes this morning's rebound, following the overnight selloff, could actually bode worse for the market come Friday, when the July

employment report

is released. He believes the market was near bottom, and with this rally could face with yet another downturn when the jobs data are released.

"We came in this morning and were so far down, with the bond at 6.16%," said Kochan.

Overnight, investors sold Treasury bonds to move into European assets. The 10-year British gilt fell to 5.30% overnight from 5.33%. The U.K.'s version of the NAPM report came in higher than expected, reinforcing the rebound in Europe. It's extended the recent shift of assets away from the dollar into the euro and other currencies.

"This is a continuation of what we were seeing at the end of last week," said Chris Iggo, international economist at

Barclays Capital

in London. "Before, the dollar was strong because the U.S. was growing at 4% while everyone else was stagnating. Now, at least one half of that equation has changed."