US Treasuries climb as factory activity contracts
Fri Dec 1, 2006
By Chris Reese
NEW YORK, Dec 1 (Reuters) - U.S. Treasury debt prices jumped on Friday and benchmark yields sunk to 10-month lows, on data showing the U.S. manufacturing sector shrunk for the first time in 3-1/2 years, reinforcing views of a Federal Reserve rate cut in the new year.
The Institute for Supply Management said its index of national factory activity fell to 49.5 last month -- below the growth point of 50 -- from 51.2 in October. It was the first time factory activity has shrunk in 3-1/2 years. For details see [ID:nN01227193].
Also supporting bond prices on Friday was data showing U.S. construction spending fell by more than expected in October, helping cement the idea in many investors minds that the Fed will have to cut rates next year to stimulate the economy. [ID:nN30224714]
The ISM data followed a report on Thursday showing a surprise contraction in manufacturing in the Chicago area in November, which also lent support to investors' outlook for a Fed rate cut.
Benchmark 10-year Treasury notes <US10YT> were trading 10/32 higher in price for a yield of 4.42 percent, the weakest since late January, from 4.46 percent late on Thursday. Bond yields move inversely to prices.
"The drop in the ISM index below 50 in November was highly encouraging for the bond market because it told us that in addition to housing, the manufacturing sector may also be faltering," said Anthony Chan, chief economist at JP Morgan Chase Bank N.A. in New York.
"The path toward easier monetary policy may occur sooner rather than later if such trends persist," he said.
Two-year bonds <US2YT> , the most sensitive to changes in interest rate policy, were trading 5/32 higher in price for a yield of 4.54 percent, the lowest in 10 months, from 4.62 percent late on Thursday.
Five-year notes <US5YT> were 9/32 higher in price for a yield of 4.38 percent from 4.45 percent, while the 30-year bond <US30YT>_was trading 12/32 higher in price for a yield of 4.54 percent.