Econ 101: Strong News = Bond Selloff

The big GDP number and the hefty Chicago Purchasing Managers Index are whacking Treasuries.
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Strong economic news has bonds reeling this morning. This morning's 4.5%

gross domestic product

figure triggered the first wave of selling in bonds. The second torpedo was the

Chicago Purchasing Managers Index

, which rose to its highest level in four years. The double-barrel dose of economic data has erased all of yesterday's gains off the bond-friendly

Employment Cost Index

.

"It's a tug of war between a strong growth number, which hurts the market, and strong inflation news, which helps the market," said John Burgess, head of fixed income at

Bankers Trust Global Investment Management

. "It's keeping us in a trading range and keeping the

Fed

on hold."

The 30-year Treasury bond was lower by 29/32 to trade at 95 4/32. The yield, which closed yesterday at 5.52%, rose to 5.59%.

The economy grew at a rate of 4.5% during the first quarter, according to the

Commerce Department

, much greater than the estimates for 3.3%. The rate of growth is less important to the bond market than the implicit price deflator, which rose 1.4%.

The rise in this inflationary component of the GDP report was not anticipated. The uptick is attributable to an increase in pay for government employees, a grouping not included in yesterday's ECI. It's "another reason for believing that the picture on wage inflation is not as rosy as was portrayed in yesterday's ECI report," said a comment by

Barclays Capital

.

The next whammy was the Chicago PMI, which rose to 63.3 in April from 57 in March. This survey of manufacturing sentiment in the Midwest, which indicates expansion in that sector of the economy when it reads over 50, is now at its highest level since February 1995.

Because this figure attempts to gauge prospects for future growth, the market pays it close attention. The relative softness of the manufacturing sector contributed to a mild slowdown in the economy late last year, but the strength of these last two reports suggests the sector is reemerging. That's bad news for the bond market, because it carries the threat of higher prices and higher employment costs. The market will look for some confirmation of the Chicago data with the release of the national version of this report Monday.