Bonds Weaken on Manufacturing Data

NEW YORK -- Bond prices fell sharply by midday Monday, after the market was hit with two key economic reports showing higher price pressures and stronger manufacturing activity.

Following a stronger-than-expected personal income and consumption report, the Institute for Supply Management's manufacturing index also arrived on the firmer side, and its prices component jumped.

The price of the Treasury's 10-year note was down 19/32 point, or $5.938 per $1,000 in face value, around midday Monday, while its yield rose to 5.13 percent from 5.06 percent late Friday. Prices and yields move in opposite directions.

The 30-year bonds were down 29/32 point and yielded 5.23 percent, up from 5.17 percent late Friday, according to Moneyline Telerate.

Two-year Treasury notes were down 4/32 point and yielded 4.93 percent, up from 4.87 percent late Friday.

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Yields on one-month Treasury bills were unchanged at 4.59 percent as the discount was unchanged at 4.51 percent. Yields on three-month Treasury bills fell to 4.76 percent as the discount fell 0.01 percentage point to 4.64 percent. Six-month yields rose to 4.94 percent as the discount rose 0.03 percentage point to 4.75 percent.

Yields are the interest bonds pay by maturity, while the discount is the interest at which they are sold.

The ISM index stood at 57.3 in April, above expectations for a 54.8 reading and up from March's 55.2. The prices paid index rose to 71.5 in April from 66.5 in March, heightening inflation concerns among bond investors. The ISM noted "major concerns" over energy and commodity prices among firms polled.

"This is another set of data to push yields higher and challenge the Federal Reserve's pause notion," said David Ader, bond market strategist at RBS Greenwich Capital in Greenwich, Conn. "We cannot look at these data and come away bullishly."

Before the ISM report, Treasuries were already seeing selling pressure when a closely-watched indicator of inflation rose to the limit of the Federal Reserve's tolerance during March.

The price index for personal consumption expenditures excluding food and energy rose 0.3 percent in March. This core price gauge increased 0.1 percent in February.

Compared with a year earlier, the core increased by 2.0 percent during March, after rising 1.8 percent in February. The Federal Reserve watches the year-over-year core PCE price index closely for signs of excessive inflation. The central bank's comfort zone for this gauge is considered to be 1.0 percent to 2.0 percent.

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