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| Old conundrum, new twist
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| Inverted or flat, the yield curve points to a weaker Federal Reserve, not a downturn. (Full story)
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NEW YORK (CNN/Money) -
Longer-dated Treasuries rose higher Wednesday in quiet trade after a report showed that service sector growth slowed sharply in September, while the dollar fell against the euro and the yen.
The benchmark 10-year Treasury note added 5/32 of a point to 99-5/32 to yield 4.35 percent, down from 4.37 late Tuesday.
The 30-year bond gained 14/32 of a point to 111-30/32 to yield 4.57 percent, down from 4.6 percent the previous session. Bond prices and yields move in opposite directions.
In shorter-dated debt, the five-year note was up 2/32 of a point to yield 4.21 percent, while the two-year note added 1/32 of a point to yield 4.19 percent.
The bond market posted most of its gains in the morning after the Institute for Supply Management said that its services index fell to 53.3 in September from 65 in August. Analysts had forecast a drop to 61.
The services sector makes up about 80 percent of the economy, including everything from hair salons to airlines, and a sharp drop could indicate an economic slowdown. Signs of economic weakness generally stoke buying in the bond market, which is considered a safe haven for investors.
But the advance stalled out midsession, partly because the prices-paid component posted a large jump, largely due to the effects of Hurricane Katrina and rising energy prices.
"The new weakness, which is probably related to the hurricane and oil, definitely set in," Josh Stiles, senior bond strategist at IDEAglobal told Reuters. "But this number was a classic dilemma for the market, because the prices paid really rocketed higher."
Analysts said trading will likely remain quiet until the release on Friday of a report on nonfarm payrolls.
The ISM did not completely change views that the Federal Reserve, which has been eyeing soaring energy prices in the wake of Hurricanes Katrina and Rita, will continue to raise interest rates at a measured pace to stem wider inflation.
Citigroup (down $0.09 to $45.25, Research) economists raised their expectations for the Fed target rate to rise to 4.5 percent by early next year, up from an earlier forecast for the target rate to hit 4 percent.
Some analysts believe bond prices also gained a bit of strength as investors fled from equity markets, retreating from those same comments by Fed policymakers.
"Comments from Fed officials overnight seem to have dealt a much bigger blow to equities than bonds," Andre de Silva, the deputy head of bond strategy at HSBC, told Reuters. "Treasuries are taking some solace from this."
In currency trading, the dollar fell against the euro and yen.
The euro traded at $1.1961, up from $1.1923 late Tuesday, while the dollar bought ¥113.97 down from Tuesday's price of ¥114.21.
The dollar has gained recently by expectations the Fed would continue to raise interest rates, which make dollar-denominated investments more attractive to foreign investors.
-- from staff and wire reports
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