Treasury prices pare early gains after ISM report hints of inflation; dollar up versus euro, yen.

April 1, 2005: 11:05 AM EST

NEW YORK (CNN/Money) - Bond prices pared early gains after a survey of purchasing managers showed March expansion slightly better than forecasts, indicating inflationary pressure.

The dollar surged to session highs against the euro and yen.
The benchmark 10-year note fell 8/32 of a point to 95-28/32, yielding 4.52 percent, up from 4.48 late Thursday. The yield briefly dipped below 4.40 just after the payroll report.
The 30-year bond lost 11/32 of a point to 108-26/32, to yield 4.78 percent, up from 4.76 late Thursday. Bond prices and yields move in opposite directions.
In shorter-dated debt, the five-year note fell 4/32 of a point to yield 4.20 percent, while the two- year edged down one tick, yielding 3.80 percent.
The Institute of Supply Management's survey of purchasing managers dipped to 55.2 in March from 55.3 in February, much as analysts had expected. However, the breakdown showed prices paid climbed to 73.0 from 65.5, upsetting bond holders who have become increasingly sensitive to any hint that inflation might be building.
Traders noted the ISM released its non-manufacturing report by mistake and the headline figure of 63.1 was initially taken by the market to be the manufacturing report, triggering a wave of selling which bonds haven't recovered from.
Treasuries had rallied earlier after a surprisingly small rise in U.S. payrolls in March temporarily eased fears the Federal Reserve might have to hike interest rates faster and farther than many had thought.
The Labor Department reported a net gain of 110,000 jobs to U.S. payrolls in March, from the downwardly revised 243,000 gain in February. That was only half of the hiring forecast by economists surveyed by Briefing.com, who had predicted a 220,000 job gain.
But the unemployment rate fell to 5.2 percent compared with 5.4 in February. Forecasts had been for the unemployment rate to edge down to 5.3 percent.
The report gave the market reason to believe there is less risk that the Federal Reserve will
hike interest rates more aggressively to combat inflation.
The market has already priced in a quarter point interest rate rise at the central bank's next
policy meeting, and had feared a half point rate hike if inflation was seen increasing at a rapid clip.
The disappointing March payroll report was reinforced by Thursday's higher-than-expected
first-time jobless claims, which rose to 350,000 in the week ended March 26. That was up from a revised 330,000 in the previous week, the Labor Department said. Wall Street economists
had forecast a drop to 320,000.
The dollar fell as it seemed less likely that the Federal Reserve would raise interest rates more aggressively, a move that would make U.S. investments more attractive to foreign investors
and boost the greenback.
The dollar bought 107.76, up from 107.11 late Thursday, while the euro bought $1.2882,
down from $1.2967.

Find this article at:
http://money.cnn.com/2005/04/01/markets/bondcenter/bonds/index.htm