Treasuries lower after data show economy solid

Thu Jul 1, 2004
By Ellen Freilich

NEW YORK, July 1 (Reuters) - Treasury debt prices drifted lower on Thursday after an upbeat report on U.S. manufacturing encouraged investors to take profits on hefty gains made in the previous session.

The benchmark 10-year Treasury note (US10YT=RR: Quote, Profile, Research) fell 9/32 in price, lifting its yield to 4.62 percent from 4.58 percent late on Wednesday.

Yields are still lower for the week, however, due to the Federal Reserve's promise to raise interest rates as gradually as inflation allows.

"The Fed will be methodical and patient," said William Hornbarger, fixed-income strategist at A.G. Edwards & Sons.

The Institute for Supply Management said its index of business conditions fell to 61.1 in June from 62.8 in May. That was right in line with analysts' forecasts, but many in the market had counted on a much lower number after the huge drop in the Chicago regional manufacturing survey on Wednesday.

"The strength we saw Wednesday after the Fed announcement was just a short-covering rally and then the ISM data we got today was not as weak as had been whispered," said Hornbarger.

"People are also worried about the employment data on Friday; most people feel it will be strong," he added.

Economists polled by Reuters have estimated the nation's non-farm payrolls added 250,000 new jobs in June after growing by 248,000 jobs in May with the unemployment rate steady at 5.6 percent. Average hourly earnings are estimated to have risen 0.3 percent in June.

Traders were somewhat heartened that the ISM prices paid index eased 5.0 points to 81, but the reading remained very high by historical standards. In general, the report tamed speculation that the economy was at risk of slowing sharply, though recent data suggested GDP growth faded a bit in the second quarter from the 3.9 percent rate of the first quarter.

The 30-year bond (US30YT=RR: Quote, Profile, Research) slipped 10/32 in price after the data, taking yields to 5.31 percent from 5.29 percent.

The five-year note (US5YT=RR: Quote, Profile, Research) was little changed, its yield steady at 3.77 percent. Two-year notes (US2YT=RR: Quote, Profile, Research) were also barely changed, their yields steady at 2.69 percent.

Two-year yields dived 18 basis points on Wednesday, the biggest daily drop in four months, as the Fed's gradualist stance sparked an unwinding of curve-flattening trades.

Other U.S. economic data released on Thursday had little impact. Last week's initial jobless claims edged up to 351,000 from a revised 350,000 the previous week, slightly above forecasts of 344,000 but not enough to alter analysts' expectations of another strong payrolls report on Friday.

June auto sales looked weak. Ford reported its U.S. car and truck sales fell 11 percent and GM (GM.N: Quote, Profile, Research) warned earlier this week that sales had disappointed in June. Chrysler was alone among Detroit automakers in reporting a rise in sales.

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