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Treasurys in sharp retreat
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March 31, 1999: 4:01 p.m. ET
Chicago manufacturing data ignites fears of inflation back on the horizon
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NEW YORK (CNNfn) - A shaky Treasury bond market recovered from the worst of its wounds Wednesday, but bond prices remained sharply lower after unexpectedly robust manufacturing data sent traders scrambling.
By 3:00 p.m. ET, the benchmark 30-year Treasury bond was down 19/32 of a point in price at 94-16/32, while the yield climbed to an ominous 5.63 percent.
The long bond plunged a full point after investors digested the implications of the Chicago Purchasing Managers index for March, which showed manufacturing pricing pressures in the Chicago area climbing at their fastest rate in nearly two decades.
In the wake of months of uninspiring manufacturing data, many traders were prepared to discount the Chicago report, and so the dramatic upturn caught the bond market by surprise.
A sluggish manufacturing sector has lagged the rest of the U.S. economy, helping curb investors' fears of unmitigated economic growth leading to a return of inflation ahead. Inflation, in turn, puts selling pressure on bonds and other fixed-income securities by making them less attractive in real terms.
In particular, bond traders now fear that Thursday's national report will be likewise unexpectedly strong. For every point the Chicago index moves, the national index generally moves about a half point, indicating a 5-point gain in the national figure.
Economists had previously forecast the national index to slip to 51.7 from last month's 52.4, indicating that while the manufacturing sector is back in growth mode, it is expanding at a slow rate.
Many investors also remained hesitant to get involved in the bond market ahead of Friday's release of March payrolls data. Treasury 30-year yields soared 7 basis points after last month's payrolls showed unexpected tightness in the job market, and investors remain wary of a repeat.
Dollar still depressed
Bonds got no support from a weaker dollar, which was left in the dust by a soaring yen as the Japanese fiscal year wound to a close.
By 3:00 p.m. ET, the dollar was down more than a full yen at 118.82 yen, finally giving up the 120-yen plateau it had clung to in recent days.
Currency traders attributed the early bout of dollar-selling to Japanese investors straightening their books ahead of Thursday, when Japan's fiscal new year begins. Dollar exchange rates traditionally slide during March and late February as this repatriation of assets into yen and yen-denominated securities gathers force.
Because many Japanese investors leap back into U.S. securities once the new accounting period begins, dollar bulls largely discounted Wednesday's losses. The U.S. economy remains demonstrably robust, they noted, while the outlook for Japan is hazy at best.
In the longer term, traders expect the currencies to move in concert with variations between Wall Street and the Japanese stock market. The recent rally in Japanese equities has spurred overseas demand for the stocks, which has in turn driven yen strength.
A correspondingly choppy U.S. stock market has inspired little such global movement of funds despite the Dow industrials' recent ascent of the 10,000 landmark.
Euro firmer but still weak
This flood of capital into yen has in turn counteracted intermittent flight-to-safety buying of dollars spawned by continuing conflict in the Balkans. The euro, on the other hand, has enjoyed no such external support, while investors have viewed the European currency as having the most to lose should the Kosovo crisis deepen.
Indeed, the euro's best friends Wednesday seemed to be scavengers looking to make a quick turnaround profit from the currency, which still wallows near historic lows.
In this climate of bargain-hunting, the euro edged up to $1.0767 from its previous close of $1.0724, but was still well off the lows it had explored before NATO's military action against Yugoslavia last week. 
-- by staff writer Robert Scott Martin
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