US Treasury debt prices were static on Monday after a mixed report on the factory sector gave no support to the idea that the Federal Reserve might trim interest rates soon to stimulate economic growth.
News that New Century Financial Corp, the biggest independent player in the troubled subprime mortgage industry, had filed for Chapter 11 bankruptcy protection did not spur any safety bid in Treasuries. The subprime sector caters to borrowers with poor credit.
Moreover, given narrow price action in oil and stocks, traders were reluctant to make big bets prior to the March US payrolls report on Friday, analysts said. Mixed March manufacturing data from the Institute for Supply Management released Monday suggested slower manufacturing growth as well as resurgence in inflation due to a broad spike in costs of oil and other commodities.
The ISM's manufacturing index dipped to 50.9 in March, below economists' expectations for a reading of 51.1. But more worrying for investors, the report's prices paid index jumped to 65.5 from 59.0 in February. "The net effect is that manufacturing is still growing. Prices paid went up but they have been jumping around," said Matthew Smith, portfolio manager at Smith Affiliated Capital Corp in New York. "There is no technical signal right now for buying interest to come in."
Benchmark 10-year Treasury notes traded flat in price for a yield of 4.65 percent, unchanged from late Friday. Volumes were light ahead of the Passover and Good Friday holidays this week.
The ISM report followed a spate of varied economy readings last week, leaving analysts and traders to conclude that the Fed would not budge on rates any time soon. "Last week's data were decidedly mixed. You have a continuation of that with the ISM," said Richard Gordon, fixed income market strategist at Wachovia Securities in Charlotte, North Carolina. "It's hard to have a conviction (on Treasuries) in either direction."
Fed policy-makers, since their latest meeting nearly two weeks ago, have reiterated that fighting inflation remains their top priority despite growth concerns stemming from the subprime mortgage crisis.
"If the inflation rate stays up at the current rate and is not converging down towards 2 percent, then it would be a high hurdle for me to be cutting rates if the economy is only marginally on the weak side," said St. Louis Fed President William Poole in a response after a speech to an economists' group.
Poole is a voting member of the monetary policy setting Federal Open Market Committee this year. Core inflation - minus food and energy costs - has remained above the Fed's comfort range of 1 to 2 percent, which has been a factor in its decisions to leave benchmark overnight US rates unchanged at 5.25 percent since June 2006.
Two-year Treasury notes, most sensitive to changes in the market's outlook on Fed policy, were flat in price for a yield of 4.59 percent. Five-year government debt prices were unchanged from late Friday, yielding 4.54 percent, while the long bond was flat for a yield of 4.84 percent.
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