NEW YORK (CNN/Money) -
Treasury prices tumbled Friday as a report showing surprising manufacturing strength brought forward market expectations for an eventual interest rate increase from the Federal Reserve.
The benchmark 10-year note dropped 31/32 of a point to 99 even to yield 4.37 percent, up from 4.25 late Wednesday. The 30-year bond tumbled 1-17/32 to 102-29/32, yielding 5.17 percent, up from 5.07 percent late Wednesday. Bond prices and yields move in opposite directions.
The two-year note fell 7/32 of a point to 99-28/32 with a 1.95 percent yield, and the five-year note lost 19/32 of a point to 100-3/32, yielding 3.35 percent.
The bond market closed at around 2:00 p.m. ET following Thursday's New Year holiday.
Treasurys had gained near Christmastime and ahead of New Year's as investors sought safe places to park their money after the United States raised the terror threat alert, sparking fears of a major attack.
That run up, and the stronger-than-expected manufacturing report, led to Friday's selloff.
The Institute for Supply Management said its main index of manufacturing activity jumped unexpectedly to 66.2 in December -- the strongest reading in 20 years -- from 62.8 in November. The number came in well above economists' forecasts.
Traders also eyed ISM's employment index, which rose to 55.5 from 51.0 in November, a sign that improvement in the languishing labor market may finally be set to accelerate.
The signs of strength in the economy could point to higher inflation in 2004, and inflation is a bond investors' worst enemy since it erodes the value of long-term investments.
All this suggested official interest rates might rise earlier than the market had expected, which sent bond prices reeling.
"The bond market is still focused heavily on the Fed commitment. The Fed is increasingly telling us that it's the performance of the economy rather than a point in time that dictates policy change. And the performance of the economy is here," said Ram Bhagavatula, chief economist at Royal Bank of Scotland.
The central bank has a chance to update its view this weekend with Fed Chairman Alan Greenspan talking on "Risk and Uncertainty in Monetary Policy."
Speaking on Sunday are Fed Governor Ben Bernanke and Vice Chairman Roger Ferguson, giving the market plenty to react to when it reopens on Monday.
In the currency market, the dollar slumped to three-year lows against the yen and weakened against the euro amid persistent concerns about the yawning current account deficit.
At around 4:00 p.m. ET, the euro was up 0.5 percent on the day to $1.2594, below record highs near $1.2650 set Wednesday.
Against the yen, the dollar was down 0.5 percent on the day to ¥106.92, not far above three-year lows around 106.70 yen the dollar hit earlier.
-- from staff and wire reports
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