Bonds rebound on manufacturing reading

NEW YORK (CNNMoney.com) -- Bond prices pared early gains but remained higher Tuesday on a weaker-than-expected regional manufacturing report, raising concerns about the softening economy.

The dollar gained against the euro, while the yen fell to a 13-month low against the greenback on reports that the Bank of Japan may not raise interest rates at its policy meeting this week.

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The benchmark 10-year note gained 6/32, or $1.87 on a $1,000 note, to yield 4.75 percent, down from 4.78 percent late Friday. Bond markets were closed Monday for Martin Luther King Jr. Day.

The 30-year bond jumped 12/32 or $3.75 on a $1,000 note to yield 4.84 percent, down from 4.86 percent the previous session. Bond prices and yields move in opposite directions.

The five-year note added 4/32 to yield 4.74 percent, while the two-year note gained one tick to yield 4.87 percent.

The New York Empire State Index, the New York Federal Reserve's reading of manufacturing strength in the region, fell to 9.1 in January from a downwardly revised 22.2 in December. Economists surveyed by Briefing.com had expected the index of business conditions to slip to 20.

Treasury prices tumbled last week, hurt by a surprising decline in U.S. jobless claims and a larger-than-expected narrowing of the U.S. trade gap.

The latest economic readings suggested there is still some underlying strength in the U.S. economy, fueling speculation among investors that the Federal Reserve will not raise interest rates any time soon.

Despite a dearth of economic readings on Tuesday, bond traders will have plenty of economic numbers and comments from a number of Federal Reserve officials to chew on later in the week.

Investors will be paying particularly close attention to December producer price index due out Wednesday and Thursday's consumer prices index for the same month, for signs about inflationary pressure.

"PPI will take center stage, but given the recent spate of better-than-expected economic news, especially housing, reports such as the NAHB index warrant careful consideration as well," Kevin Flanagan, fixed income strategist for global wealth management with Morgan Stanley in Purchase, New York, told Reuters.

In currency trading, the dollar gained against the euro and the yen. The euro bought $1.2920, down from $1.2935 late Monday. The dollar bought ¥120.62, up from ¥120.45 the previous session.

--from staff and wire reports

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