Friendly Manufacturing Report and Month-End Buying Lift Treasuries

But volume was light and key economic reports are due out next week.
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Treasuries enjoyed a nice little bounce today, thanks mainly to a friendly

Chicago Purchasing Managers' Index

. But it wasn't enough to decidedly reverse the negative trend that's gripped the bond market all week.

Not according to Michael Pianin, vice president at

ING Futures & Options

in Chicago, anyway. In a midday email titled "Scenarios for a Memorial Day Friday," he mused: "USU9

the September Treasury bond futures contract settles over 117 16/32: Upward momentum reinitiated. USU9 settles under 116 30/32: Downside momentum intact. USU9 settles between 116 30/32 and 117 16/32: Have a beer and BBQ."

Time for a frosty one and a burger: The September contract

settled at 117 15/32, up 9/32. The benchmark 30-year bond itself ended the day 10/32 higher at 91 27/32, its yield shedding 2 basis points to 5.83%.

But while volume was very light in today's holiday-shortened session (the futures closed at 2 p.m. EDT instead of at 3 p.m.), an uneventful close was never a foregone conclusion.

Over the course of the session, the September contract traded as high as 117 27/32 and as low as 116 26/32, and the cash bond rose as much as 19/32 and fell as much as 7/32.

The selling came first, and it was panicky, said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read

. There was no clear trigger, he said. "We'd been trading poorly all week. It was a lower-brain-stem reaction: 'Get me out!'"

Then, as the 10 a.m. EDT hour approached, when the May Chicago Purchasing Managers' Index would be released, things started looking up.

The April edition of the regional manufacturing indicator, released

April 30, marked the start of the latest leg of the bear market in bonds that started last fall. The report was strong across the board, with a particularly large jump in the component that measures prices paid by Chicago-area manufacturers.

So when today's data gave back a large portion of April's gains in prices and elsewhere, the bond market heaved a big sigh of relief. The overall purchasing managers index, for which 50 is break-even, slipped to 57.9 in May from 63.3 in April, and the prices-paid component slipped back to its March level of 52.5 from 56.7.

On the margin, Mahoney said, the report improved the outlook for the

Fed

, which last week adopted an official bias in favor of higher short-term interest rates, to hold off on raising the fed funds rate at its next meeting on June 29-30.

Next week's economic data should bring the picture into sharper focus. Tuesday brings the

Purchasing Managers' Index

, the key national manufacturing indicator, and the May

employment report

arrives on Friday. "The Fed is going to have to have a reason, and if all of the data are coming in kind of benign, then they don't have to move," Mahoney said.

As the day wore on, the market also benefited from the last-day-of-a-refunding-month effect. In the four months when the Treasury issues new notes, bonds or both in the quarterly refunding (February, May, August and November), on the last day of the month the new securities get added to indices that track the bond market, triggering buying of the securities by money managers who mimic the indices.