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Treasuries Lower as Mortgage Rout Weighs
Friday August 1, 2:34 pm ET
By Ros Krasny


CHICAGO (Reuters) - U.S. Treasuries held at barely lower levels on Friday after an erratic morning in which prices plummeted early in ongoing fallout from the mortgage market.
Selling from firms rebalancing the duration of their mortgage portfolios as mortgage prepayments slow in the face of rising interest rates has dominated the fixed-income landscape this week.

Capping a busy morning of economic data, the Institute for Supply Management index for July pointed to better U.S. economic prospects for the second half.

"The ISM report shows the industrial economy is turning up, which has been the last holdout. We're seeing a very good platform from which to launch second-half acceleration," said David Littman, chief economist, Comerica Bank.

The data was bearish for Treasuries as signs of an improving economy raise the specter of higher rates ahead. Still, at 51.8 the manufacturing activity index was a shade below "whisper numbers" heard after the strong Chicago-area purchasing managers' report on Thursday that tempered the report's impact.

Treasuries briefly found support from weakness in major equities indexes after the July payrolls report gave a mixed report card on the U.S. jobs situation.

The July unemployment rate fell to 6.2 percent from 6.4 percent, the first decline for more than a year, but nonfarm payrolls dipped unexpectedly by 44,000 and June payrolls were revised to a drop of 72,000 from a 30,000 decline.

Companies slashed payrolls for the sixth straight month. Manufacturing jobs continue to disappear while temporary jobs are expanding.

Worries about an ongoing "job-loss recovery" and its impact on consumer confidence encouraged some value-type buying in Treasuries.

The benchmark 10-year Treasury note is making a stand near the 4.50-percent yield after briefly hitting a one-year high of 4.59 percent early Friday.

Among others, European mutual funds were said to be buyers around 4.50 percent. Dealers also foresee a switch by consumers out of money market funds into longer certificates of deposit following recent curve steepening.

"A 4.5-percent return with inflation at 1.5 percent is not a bad rate of return. Still, with any further evidence of strong growth, 4.5 percent on 10-year yields might look low," said John Nyhoff, vice president of Tokyo-Mitsubishi Futures.

Ten-year notes (US10YT=RR) fell 13/32 for a yield of 4.46 percent, up from 4.41 percent late Thursday. The 30-year bond (US30YT=RR) was down 8/32 for a yield of 5.37 percent, up from 5.36 percent late Thursday.

Two-year notes (US2YT=RR) fell 9/32, with their yield at 1.89 percent, and five-year notes (US5YT=RR) were down 12/32 at a yield of 3.32 percent.

At the Chicago Board of Trade (News - Websites), Sept. 30-year bond futures posted a contract low of 104 6/32, equivalent to a cash yield of about 5 1/2 percent and far below the old low set Thursday and on Nov. 27 at 105 3/32.

George DeMarcilla, bond analyst at Alaron Trading, said there is major technical support at the 103 to 104 level in Sept. bond futures.

"This look like a great place to be looking to buy," he said.

Open interest in CBOT 10-year Treasury note futures made a record high on Thursday at 1,057,959 contracts.

Looming next is the record quarterly Treasury refunding. The U.S. Treasury will sell a total of $60 billion in three-, five- and 10-year notes Tuesday through Thursday.

http://biz.yahoo.com/rb/030801/markets_bonds_9.html