Ooops! Early NAPM Release Whacks Bonds

Strong components of both the National and Chicago Purchasing Managers' Indices erase month-end gains.
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Bond prices have turned negative following the premature release of the

Purchasing Managers' Index

for August. While the report's headline number was roughly in line with expectations, its prices paid and employment components both rose strongly, with the latter stoking fear that Friday's August

employment report

will include a robust gain in manufacturing payrolls.

The PMI, which indicates manufacturing sector expansion when it's above 50 and contraction when below, rose to 54.2 in August from 53.4 in July. Economists surveyed by

Reuters

had predicted a rise to 54.5.

But the index's employment component advanced to 53.4 from 49.6. And a separate prices index, which does not go into the overall index, rose to 59.8, its highest level since June 1995, from 54.7.

Slated for release tomorrow at 10 a.m. EDT, the PMI inadvertently went out via a broadcast fax service sometime before noon today, a spokeswoman for the

National Association of Purchasing Management

said. The organization isn't yet saying exactly what time the release went out or how the mistake happened.

The benchmark 30-year Treasury bond was lately down 16/32 at 100 12/32, lifting its yield 4 basis points to 6.10%. Earlier, the long bond traded up as much as half a point, as Treasuries are wont to do on the last day of the month, particularly in months when there has been a quarterly refunding.

Month-end buying of Treasuries is triggered by the recalibration of the various indices that track the bond markets that occurs on the last day of each month. As the index-makers replace old bonds with new ones, investors who aim to track the performance of the indices likewise buy the new securities.

The effect on the Treasury market is particularly strong in months when there has been a quarterly refunding -- the Treasury's quarterly auction of long-dated notes and bonds -- because many investors are effectively forced to buy the new issues when they enter the index. (For bond nerds: The

Lehman Treasury Index

is expected to undergo a duration-lengthening of 0.19 years today, which is normal for a refunding month, but compares to a normal lengthening of 0.07 to 0.08 years in a nonrefunding month, according to

Lehman Brothers

.)

The bond market has few other reasons to rally today. The dollar continues to struggle against the yen, lately trading at 109.16, a level it hasn't closed below since Jan. 11. A strong dollar dampens inflation by keeping import prices low.

As for regularly scheduled economic data, the day's most important report, the

Chicago Purchasing Managers' Index

for August, much like its national counterpart, was friendly on the surface, less so beneath it. The regional manufacturing indicator, studied for its fair ability to predict PMI, fell to 56.1 from 60.5. Economists surveyed by

Market News International

had predicted a much smaller decline, to 60.

But while the index was dragged lower by a sharp drop in its production component (to 58.9 from 66.2), the new orders component rose almost as strongly (to 66.1 from 60.4), predicting a rebound in production in September,

Deutsche Bank Securities

Senior Economist Joseph LaVorgna noted.

Also detracting from the headline number, the report's prices paid component rose sharply to 63.8, its highest level since June 1995, from 59.8.

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