More Manufacturing Strength Keeps Long Bond Down

The market awaits Friday's jobs data for March.
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Another strong purchasing managers' survey has the 30-year bond approaching the 5.7% level, which since July 1998 was only briefly broached at the beginning of last month. Even though Friday's March unemployment report will be hamstrung by

seasonal adjustments, bonds would bounce off the current yield on a weak report. And of course, if nonfarm payrolls exceed expectations, another selloff is in the cards.

For today, the 30-year Treasury bond is down 23/32, to trade at 93 28/32. The yield rose to 5.68%.

Traders are accustomed to the payroll figure exceeding expectations, which is perhaps why there wasn't a lot of buy-the-rumor, sell-the-news type activity in anticipation of a weak number. Economists often underestimate payroll figures, so the bond market's squeal point -- the point at which traders stop saying 'well, okay' and begin saying 'aaaarrgghh!' -- is much higher than the consensus estimate.

Economists are forecasting a 166,000 increase in nonfarm payrolls, and for the household unemployment rate to drop to 4.3% from 4.4%. But traders are holding their breath in case the

Labor Department

reports 250,000 in new jobs and a drop in the unemployment rate to 4.2% on the back of a reviving manufacturing sector. But more than likely, the gains will be minimal, as seasonal adjustments should take the life out of the construction sector. Jobs in that sector are generally added back into the report in this month as the weather eases up, but they've already been accounted for in January and February.

Long- term Treasury securities have continued to widen out when compared with short-dated securities. The difference in basis points between the two-year note and 30-year bond is currently 68 basis points, which reflects growing concern about inflation. The concerns are founded on strengthening oil prices, low jobless claims, and the improvement in the manufacturing surveys, viewed as effective gauges of sentiment among manufacturing producers.

"The yield in the longer-dated securities do allow for a reasonably strong report," said William Sullivan, money market economist at

Morgan Stanley Dean Witter

. "Throw on top of that, there was a heavy corporate calendar. So you have a weaker market setting going into a critical set of statistics."

Sentiment in the manufacturing sector has improved markedly.

Chicago's purchasing managers' index

rose to its highest level since last April yesterday. Today the national version of that report rose to 54.3, up from February's 52.4 and the highest reading since November 1997. A reading of greater than 50 indicates expansion in the manufacturing economy, less than 50, contraction. The employment index rose to 48 from 45, the best reading in this series since last May.

"There's renewed momentum in manufacturing, and the back end is moving lower," Sullivan said. "Clearly the psychology has deteriorated in the Treasury bond market, so if the figures are stronger than the consensus there's a wherewithal to establish new highs. I could easily see the bond going to a 5.80% yield as an example."

The short end of the curve, however, is being supported by the lax performance the stock market has put in since closing above 10,000 earlier in the week, and tensions in the Balkans. The two-year note was lately down 1/32 to yield 5%. Kosovo is not a strategic region for financial markets, but

NATO

is stepping up its bombing campaign on targets in Belgrade, ensuring that the conflict is not going to be brief as originally sought by

President Clinton

.

"Kosovo is weighing heavily, but it remains a front-end event at this point," said Tom Himmelberg, senior fixed income analyst at

Thomson Global Markets

. "It's been in the Euros and the shorter term Treasury. We haven't seen it move out on the curve, but people are not betting against the bond market now." The market is closing at noon Friday. Liquidity will be limited, and Friday's move will likely be exaggerated.

One consequence of the Fed's decision to release a statement on the change in its directive immediately after

Federal Open Market Committee

meetings was that it made the release of Fed minutes from the previous meeting a few days later all but useless. Today, the FOMC released

minutes from the Feb. 2-3 meeting. Fed watchers used to look forward to answering a few questions from this release, namely: Did they change their directive? What do they say in their summary? Did anybody dissent?

But the directive is now being changed less frequently; the market has more timely statements from the Fed on their collective thinking, and the dissenters are generally infrequent. So, the questions are moot.