Bonds end higher on manufacturing weakness

NEW YORK (CNNMoney.com) -- The yield on the benchmark 10-year Treasury note hit its lowest level in 10 months following a surprisingly weak manufacturing reading, prompting investors to bet that the Federal Reserve may soon start cutting interest rates.

The dollar fell to a 20-month low against the euro and was also weaker versus the yen.

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The benchmark 10-year note rose 7/32, or $2.18 on a $1,000 note, to yield 4.43 percent, down from 4.46 late Thursday.

Earlier in the session, the benchmark yield reached its lowest level since late January.

The 30-year bond climbed 8/32, or $2.50 on a $1,000 note, to yield 4.54 percent, down from 4.56 percent in the previous session. Bond prices and yields move in opposite directions.

The five-year note rose 8/32 to yield 4.38 percent, while the two-year note climbed 7/32, yielding 4.52 percent.

Treasury prices pared early losses Friday after a closely watched survey of manufacturing executives, produced by the Institute of Supply Management, revealed that the sector shrank for the first time in over three years in November.

The November manufacturing index fell to 49.5 from October's 51.2. That was below the 52 predicted by analysts surveyed by Briefing.com.

The below 50 reading, which indicates a contraction in the sector, bolstered bond investors' confidence, fueling speculation that the Fed wouldn't have reason to raise rates anytime soon and could instead start easing rates.

"Historically, when the ISM manufacturing index dips below 50, the [Fed] starts to cut interest rates," Steven Wood, economist at Insight Economics in Danville, California told Reuters.

He added that "although we are not convinced that the Fed is likely to ease any time soon, they have at the least been sidelined for an extended period of time."

Treasury prices also got a lift following a report by the Commerce Department that revealed that construction spending fell by a more-than-expected 1 percent in October.

In related news, Fed chief Ben Bernanke did not discuss the economy or the outlook for inflation or interest rates on Friday morning at a conference on monetary policy.

Chicago Federal Reserve President Michael Moskow suggested that the U.S. economy may require more monetary policy firming to bring down remaining inflationary pressures, in a speech delivered Friday.

Bond traders will get a breather from this week's deluge of economic reports over the next week. Investors will be focused on a report on third-quarter productivity and October factory orders, both of which are due out Tuesday, but the biggest reading of the week will come next Friday when the government delivers its November employment report.

In currency trading, the dollar slipped on the ISM report. The euro rose to its highest level against the U.S. currency in 20 months, climbing to $1.3312 from $1.3246 late Thursday. The dollar bought ¥115.34, down from ¥115.74 the previous session.

--from staff and wire reports

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