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Treasuries Rise After Midwest Manufacturing Index Declines

Nov. 30 (Bloomberg) -- U.S. Treasuries rose after a measure of manufacturing in the Midwest declined this month to the lowest in more than three years, boosting expectations the Federal Reserve may reduce interest rates next year. Bonds also increased as the Labor Department's weekly tally of new claims for unemployment insurance benefits unexpectedly rose to the highest in more than a year. A separate report showed the Fed's preferred measure of inflation, which excludes food and energy costs, was up 2.4 percent from a year earlier, matching the gain in September. ``The bond market is effectively saying the Federal Reserve is in denial and there's going to be more pain to the economy,'' said Michael Cheah, who manages about $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``I remain extremely bullish on the bond market.'' The benchmark 10-year note's yield declined 4 basis points, or 0.04 percentage point, to 4.48 percent at 11:10 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield earlier reached 4.47 percent, the lowest since Jan. 26. The price of the 4 5/8 percent note maturing in November 2016 rose 11/32, or $3.44 per $1,000 face amount, to 101 6/32. Cheah two months ago predicted the 10-year yield would reach 4 percent by mid-2007.
Treasuries extended gains after the National Association of Purchasing Management-Chicago said manufacturing growth in the Midwest slowed in November. The group said its business barometer unexpectedly declined to 49.9, the lowest reading since April 2003, from 53.5 in October. A reading below 50 signals contraction. The median estimate in a Bloomberg News survey called for the index to reach 54.4. Along with the Institute for Supply Management's national factory index to be released tomorrow, the Chicago report is viewed as a strong indicator of whether the Fed will lower interest rates, Paul Muoio, a director in futures sales at Citigroup Global Markets Inc. in New York, wrote to clients. The ISM may say tomorrow its index of manufacturing businesses rose to 51.9 in November, from 51.2 last month, according to the median forecast in a Bloomberg News survey. Readings above 50 indicate expansion. The central bank's last series of interest-rate cuts in 2001 began five month after the Chicago index dropped below 50. ``These surveys are about as big as it gets from the market's point of view,'' Muoio said.
Initial jobless claims increased by 34,000 to 357,000 in the week that ended Nov. 25, the highest since October 2005, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, rose to 325,000 from 317,750. Treasuries remained higher after the Commerce Department said its price gauge tied to spending patterns and excluding food and energy costs rose an annualized 2.4 percent in October. The median estimate of economists surveyed by Bloomberg News was for inflation of 2.3 percent. Fed Chairman Ben S. Bernanke and other policy makers have said they would be comfortable with a 1 percent to 2 percent increase in the measure over a 12-month period. Interest-rate futures contracts suggest a 73 percent chance the Fed will reduce borrowing costs a quarter-percentage point to 5 percent by March. The odds were 68 percent yesterday. The central bank raised its target overnight lending rate between banks to 5.25 percent in June and left it unchanged at its three meetings since then. U.S. retailers' November sales rose less than analysts estimated, adding to evidence of a slowing economy. Wal-Mart Stores Inc., the world's largest retailer, reported a 0.1 percent decline. November same-store sales rose 2.1 percent, the weakest since March, mainly because of Wal-Mart's decline, the International Council of Shopping Centers said today. ``The gradual realization that we've seen the peak of the U.S. cycle, both inflation and growth, and this is the highest level of rates we are likely to get, has made people comfortable being long,'' said Amitabh Arora, chief U.S. interest-rate strategist at Lehman Brothers Inc. in New York.

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Do you believe that, with real estate prices failing to increase, that 29% of homeowners who closed mortgages in the first nine months of 2005 are sitting on zero or negative equity? It would be hard to believe that figure has improved. For further ?good news? mortgage demand decreased 3.9% last week. Applications to refinance fell 9.6% but purchase applications increased 1.3%. Overall the index is 5% higher than four weeks ago but 4% below its year ago level. New home sales were down in October by 3.2%, and September was revised downward. On a year-over-year basis, sales are down by a large 25.4%, although in the West sales were up 3%.

What is the market doing today? Mortgage prices, unchanged yesterday, have improved slightly after Personal Income (+.4$, +.5% expected), Personal Consumption (+.2%, +.1% expected), and Jobless Claims (357k, 310k expected!) were announced. And for those that follow these things, the Unemployment data, which normally is announced on the first Friday of the month, does not come out tomorrow but instead next Friday.