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Treasury Prices Drop

From Standard & Poor's Equity Research

MARKETSCOPE : Treasury bond prices fell on Wednesday, after a strong June ADP employment survey supported expectations of a hot June labor report Friday.

The benchmark 10-year Treasury note tumbled 17/32 to 99-09/32 for a yield of 5.22%. The 30-year bond sank 29/32 to 88-19/32 for a yield of 5.26%.

Stronger-than-expected May factory orders contributed to a bearish backdrop. News hit that U.S. Factory Orders rose 0.7% in May after falling 2.0% in April.

Speculation is building that the Bank of Japan will raise its benchmark rate this month, which added pressure on Treasuries. These factors prevented news of North Korea's missile tests from sparking a rally in bonds on back of a flight to safety, although gold prices did benefit. Stocks were down as the bond market closed.

The outlook for the US economy and interest rates is now at a crucial juncture, says Mark Miller of HBOS Treasury Services in London. He adds that growth appears to be slowing under the weight of higher energy prices and prior policy tightening. With interest rates already mildly restrictive, some easing in policy may be appropriate next year to help prevent a more substantial slowdown, he says.

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