DATA from Bloomberg

Treasuries Fall as ISM Services Index Increases, Oil Declines Listen
Sept. 6 (Bloomberg) -- U.S. Treasuries fell after the Institute for Supply Management's services index unexpectedly rose and oil prices declined, bolstering the case for a Federal Reserve interest-rate increase this month.
Ten-year notes declined the most in three weeks. The ISM report follows a rally last week that pushed 10-year yields to the lowest since July as high energy prices and damage caused by Hurricane Katrina caused traders to pare their estimates for how many more times the Fed will raise rates.
``The idea that one storm could change our economic future is a bit overblown,'' said Mark MacQueen, co-founder of Sage Advisory Services Ltd. in Austin, Texas, which manages about $3.9 billion in fixed-income investments. ``The Fed is going to stay the course and keep tightening rates.''
The yield on the benchmark 10-year note rose 5 basis points, or 0.05 percentage point, to 4.08 percent at 12:31 p.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. The yield fell 15 basis points last week and is down from last month's high of 4.44 percent on Aug. 9. MacQueen expects the yield to reach 4.40 percent by year-end. Two-year yields increased 7 basis points to 3.81 percent.
The price of the 4 1/4 percent note maturing August 2015 declined about 3/8, or $3.75 per $1,000 face amount, to 101 3/8. Markets in the U.S. were closed yesterday for the Labor Day holiday.
The ISM's non-manufacturing index was 65 last month, compared with 60.5 in July. A reading of 60 was expected, according to the median estimate of 55 economists in a Bloomberg survey. Measures greater than 50 signify expansion.
Four-Week Surge
A four-week surge in bonds may end as oil producers and refineries resume operations shut by Katrina. Economists at Lehman Brothers Inc. and Bear Stearns & Co. kept their predictions for the Fed to raise rates at its three remaining meetings this year, even as they cut forecasts for growth.
``This level of yields is too low and we'd look to sell Treasuries,'' said Michael Markovic, a fixed-income strategist at Credit Suisse Group in Zurich. ``As oil prices are coming down people are seeing that the economic outlook for the U.S. is still strong and the Fed will keep going.''
Markovic said the 10-year yield may rise to 4.6 percent by year-end.
The Treasury today said in Washington today that it will sell $13 billion of five-year notes tomorrow and $8 billion of 10-year notes a day later. The amount was in line with the estimate from Wrightson ICAP, a Jersey City, New Jersey-based government finance research firm.
Oil and Fed
Crude oil has declined about 6.4 percent since reaching a record high of $70.85 a barrel on Aug. 30 on the New York Mercantile Exchange. It was $66 today, down 2.32 percent.
Oil prices and 10-year Treasury yields moved in the opposite direction 76 percent of the time in the last 20 days, according to Bloomberg correlation data. The inverse correlation started in July. In the last year, oil prices and yields moved in the same direction about 5 percent of the time.
Fed policy makers may conclude that the hurricane poses more risk of inflation than of an economic slowdown, and probably will raise rates on Sept. 20, comments by current and former policy makers at the central bank have suggested.
``If you look at the record at how the U.S. has weathered shocks, we have a very, very resilient economy,'' Harvey Rosenblum, director of research at the Fed Bank of Dallas, said in an interview. Fed policy makers are likely to weigh their response to Katrina against how strong the economy was before the storm. ``Initial conditions matter,'' he said.
Yield Curve
The difference in yield between two- and 10-year notes was 28 basis points today, unchanged from the end of last week. The spread has widened from 12 basis points on Aug. 29, as traders increased bets the Fed would pause in its rate increases. The difference in yields between short- and long-maturity debt is known as the yield curve.
The Fed has raised its target for overnight loans between banks by a quarter-point at each of its 10 meetings since June 2004, bringing the rate to 3.5 percent.
The yield on the September federal fund futures contract was 3.565 percent, showing traders see more than an 80 percent chance the Fed will boost its key rate by another quarter percentage point to 3.75 percent at their next meeting on Sept. 20.
`Some Confidence'
``The Fed could forego one (rate increase) and it would probably bring some confidence to people that are concerned about the overall economy and not hurt our fight against inflation,'' Sen. Charles Grassley, chairman of the U.S. Senate Finance Committee and a Republican from Iowa, said in an interview.
U.S. Treasury Secretary John Snow on Sept. 2 said damage from the hurricane will slow economic growth for at least a quarter and won't cause significant longer-term effects. Snow, who met with Fed Chairman Alan Greenspan on the same day, said they had a ``shared view'' of the economic outlook.
``People are trying to figure out what's the effect on the economy going to be and what's the Fed going to do about it,'' said Scott Gewirtz, head of Treasury note and bond trading at New York-based Lehman. Lehman is one of the 22 primary dealers of U.S. government bonds that trade with the Fed. ``The market still expects them to raise rates.''
Auctions
Borrowing costs at the 10-year note sale may decline as demand from international investors grows. At last month's sale of the 10-year securities, foreign buyers bought 46.9 percent of the notes, compared with 10.8 percent in June.
``The Fed is closer to done than most people think,'' said Thomas Tucci, head of government bond trading at Mizuho Securities USA Inc. in Hoboken, New Jersey. ``It seems to be a bit premature'' to expect inflation to accelerate because of higher oil prices, he said.
Before the hurricane, the U.S. economy was expected to grow 4.1 percent this quarter, up from a 3.3 percent pace in the second quarter, a monthly Bloomberg survey showed.
The Labor Department on Sept. 2 said the economy added 169,000 jobs in August, fewer than the median forecast in a Bloomberg survey. The hurricane may cut 500,000 jobs from U.S. payrolls this month, economist Ian Shepherdson of High Frequency Economics in Valhalla, New York, wrote in a research note last week.
Hedge-fund managers and other large speculators decreased their so-called ``net long'' positions in 10-year note futures in the week ended Aug. 30, according to U.S. Commodity Futures Trading Commission data, released Sept. 2.
Speculative long positions, or bets prices will rise, outnumbered short positions by 26,703 contracts on the Chicago Board of Trade. The week before, traders were net-long 58,841 contracts. To contact the reporters on this story:
Joshua Krongold in New York at jkrongold2@bloomberg.net;
Elizabeth Stanton in New York at estanton@bloomberg.net.
Last Updated: September 6, 2005 12:32 EDT