Buyers of Treasuries Scared Off by Economic News

The usually overlooked NAPM nonmanufacturing index has shaken the unsteady bond market with its strength.
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That's two for flinching.

Bonds were modestly higher for a little while, until two economic releases normally regarded as second-tier erased all Treasury gains in a flash. The sharp turnaround underlines how sensitive the Treasury market is to strong economic data and exposes the dearth of support for a rally.

"The market had registered a modicum of improvement and then it hit a brick wall at 10 a.m.," said Bill Sullivan, money market economist at

Morgan Stanley Dean Witter

.

Prior to 10 a.m. EDT, buyers were lifting the market off its nine-month low, and at one point the bond was higher by 10/32. But today's economic reports, March

factory orders

and the

National Association of Purchasing Management's

April nonmanufacturing index, demonstrated that there's little resolve among buyers to produce a lasting rally. Lately the 30-year Treasury bond was up 3/32 to trade at 93 15/32. The yield was down 1 basis point to 5.71%.

The NAPM's nonmanufacturing index, normally overlooked by the market because of its youth, rose in April to 64 from 62.5 in March. In what might be a coming-of-age for this 11-month-old release, two different sources pointed to the price component of this index, which rose to 55.5 from 50.5, as causing the most dismay. This component measures the prices companies are paying for materials and services, and it flags the possibility that these increases will be passed on to consumers, potentially contributing to a rise in inflation. According to the NAPM, this is the second straight increase in this category after 12 months without any increase.

While economists expect this release will gain acceptance over time, the NAPM has been compiling data for only two years and is not adjusting the index for seasonal factors yet.

In addition, factory orders increased 2% in March, besting the average forecast of economists surveyed by

Reuters

for a 1.2% rise. The

Commerce Department

also revised February's decline to 1.8% from 2.5%. This report measures the pace of new orders for manufactured durable and nondurable goods. An increase in orders also indicates that manufacturers see demand for their goods rising, pointing to strength in this sector -- something that wasn't witnessed during the second half of last year.

However, the factory orders report is generally considered old news because the report on

durable goods orders

, which accounts for 57% of factory orders, is released a week earlier. But today's release revised the previously reported 2% gain in March durable goods orders to 2.9%, and Sullivan said some of the bond market's reaction was based on this revision.

"I think just the extent in which the actual gain eclipsed expectations and included an upward revision to durable goods means the manufacturing sector finished the first quarter with more momentum than we thought," said Sullivan.

Today the

Treasury Department

announced the

details of next week's quarterly refunding sale. The government will sell $15 billion of five-year notes and $12 billion of 10-year notes at auctions to be held next Tuesday and Wednesday, as expected. The Treasury previously eliminated the sale of 30-year bonds at the May refunding since the government's borrowing needs have been reduced.

During this morning's press conference,

Gary Gensler

, Under Secretary for Domestic Finance, told reporters said the Treasury is considering buying back aging bond issues rather than continuing to limit the size of new bond issues, according to

Reuters

.

Smaller bond offerings are less liquid, and to retain as much liquidity as possible while still reducing borrowing, the Treasury has eliminated maturities such as the seven-year note and reduced the frequency of auctions to avoid cutting down the size of the bond auctions.