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Treasuries Inch Up After U.S. Terror Alert

Mon Aug 2, 2004
By Pedro Nicolaci da Costa

NEW YORK (Reuters) - U.S. Treasury debt prices climbed moderately on Monday as unusually specific terrorism alerts from the Homeland Security Department gave safe-haven government debt a positive tilt.

Bonds largely shrugged off a report on U.S. factories reflecting both strong output for July and a mild pullback in hiring for the sector.

Overall, the market's muted response to both the threat of attacks and the day's economic news underlined a tight trading range that traders said is likely to persist at least until the release of Friday's U.S. July jobs report.

By the afternoon, the benchmark 10-year note (US10YT=RR: Quote, Profile, Research) was up 6/32 in price, lowering its yield to 4.45 percent from 4.48 percent on Friday.

The Institute for Supply Management's business activity index rose to 62.0 in July from 61.1 in June, in line with the median forecast. However, many had been looking for a higher number after the Chicago PMI beat all expectations last week.

Still, the report was upbeat by most standards and there was little follow-through buying of Treasuries in its wake.

"The report sends a strong signal that manufacturing and output will expand at a rapid clip in the third quarter," said Jayanth Nazareth, an economist at JP Morgan in New York.

The ISM survey's employment index dipped, but at 57.3 was still strong by historical standards and should not change analysts' forecasts for a sizable rise in payrolls for July.

Monetary policymakers have argued in recent weeks that a June slowdown in both consumption and employment was a transitory phenomenon, not the start of a trend.

By the latest tally from a Reuters poll, median forecasts hint at the creation of about 228,000 jobs last month after a disappointing result for June.

Such a result would not please bond bulls, however, since they assume it would almost guarantee the Federal Reserve will raise interest rates when it meets in early August.

For now, two-year notes (US2YT=RR: Quote, Profile, Research) were up 2/32, their yield having eased to 2.65 percent from 2.69 percent on Friday. Five-year notes (US5YT=RR: Quote, Profile, Research) added 4/32, nudging yields to 3.67 percent from 3.69 percent.
Thirty-year bonds (US30YT=RR: Quote, Profile, Research) gained 5/32, taking their yield to 5.19 percent from 5.20 percent.

Upcoming supply should also tend to keep Treasury yields from easing much further. The government's quarterly refunding -- probably comprised of around $54.0 billion in three-, five- and 10-year notes -- is scheduled to take place next week.


The United States raised its security alert level to high on Sunday after intelligence suggested a threat against the International Monetary Fund and World Bank in Washington and the New York Stock Exchange, Department of Homeland Security chief Tom Ridge said.

The New York headquarters of Citigroup Inc. (C.N: Quote, Profile, Research) -- the world's largest financial company -- and the Prudential Financial (PRU.N: Quote, Profile, Research) building in Newark, New Jersey, were included in the warning.

It was the first U.S. terror alert to focus on a specific sector of the economy and the dollar slipped and stocks retreated as investors bought U.S. government securities. The fears also helped push oil prices to a fresh record high.

Traders speculated that if a major attack were to occur, it could make it harder for the Fed to raise interest rates. So far the market expects a hike at all four of the Fed's remaining meetings this year, but a terror incident could hurt consumer and business sentiment and so threaten the economy.





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