NAPM Lifts Bonds From Early Fall

The fixed-income market drifts into late afternoon with a modest decline as traders turn their eyes toward Friday's jobs report.
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What could have been a massive braining today turned into just a minor downturn. Treasuries were hammered overnight in the European and Asian markets but recovered after the 10 a.m. EDT release of friendly economic data.

The

National Association of Purchasing Management's

index of manufacturing sentiment fell to 53.4 in July from 57 the previous month. That's still interpreted as growth in the sector (any reading above 50 shows growth), albeit at a slower pace than in June. Analysts said the moderation in this report gave the market a catalyst to regain some of last week's losses.

Lately the 30-year Treasury bond was down 4/32 to trade at 88 7/32. The yield rose 1 basis point to 6.12%.

"Evidently, the market was prepared for the worst, and we got a relief trade afterward," said Ken Logan, managing analyst at

Thomson Global Markets

. After last week's unfriendly

Employment Cost Index

and

Chicago Purchasing Managers' Index

, "the market was on the defensive."

That defensive posture turned into a full-fledged retreat overnight, when better-than-expected economic data out of the U.K. and a selloff in Japan's bond market resulted in a Treasury selloff. The yield on the 10-year Japanese government bond rose 4 basis points to 1.825%. The U.K.'s own purchasing managers' index rose to its highest level since 1997, evidence of a rebound in demand in Europe.

This rebound has contributed to the recent weakness in the dollar versus the euro and yen during the last few weeks. As investors perceive increased strength in other economies, they've shifted some assets away from the U.S. The dollar was lately trading at 114.28 against the yen, compared with 118.18 two weeks ago. The euro currently trades at $1.068, compared with $1.031 two weeks ago.

For today, at least, the market was able to turn on the 10 a.m. release of the NAPM report and the construction spending numbers. "When the NAPM came out at 10, it showed a bit of moderation. We got a bit of a relief trade out of it, but it was mainly short-covering and professional-led," said Logan. He called the afternoon's relative calm "a realization that we're going to mark time until Friday's payroll report."

Components of the NAPM release were mixed. Employment decreased in July, to 49.6 from 51.9, and new orders fell from 54.4 from 61.7. However, prices paid, a measure of what producers are paying for materials, rose to 54.7 from 53.5.

Construction spending rose 0.5% in June after a 1.4% revised decline in May. On a year-over-year basis, spending is rising at an 8% rate, compared with 12.7% in March, but higher than last June's 7% rate of increase.

"The construction data provide a sign that this sector is responding to a tighter interest-rate environment, but I don't think the market is going to get any mileage out of it until housing is slowing down," said Adam Blankman, Treasury market analyst at

Standard & Poor's MMS

.