NEW YORK: Treasury prices climbed last week as a weaker-than-expected report on the US service sector brought buyers back into the market.

Confounding economists' forecasts for another blockbuster month of services growth, the Institute for Supply Management's (ISM) index of non-manufacturing activity dipped to 58.6 in December, versus 60.1 in November.

That was its lowest reading since May.

The surprise drop caught some traders off guard, prompting them to buy Treasuries in order to unwind positions they had taken based on expectations for a stronger figure.

"The Treasury market likes the headline, because it was weaker than what it thought," noted Joe LaVorgna, senior US economist with Deutsche Bank Securities.

The gains were compounded by purchases related to corporate debt sales, such as a US$4-billion deal from Goldman Sachs.

Dealers often hedge ahead of a deal by selling Treasuries - known as a rate-lock - and thus have to buy them back once the offering is done.

Such moves helped the benchmark 10-year note rise 27/32, to yield 4.27 per cent, down from 4.33 per cent late last Monday.

Bond prices were poised for some sort of rebound after two days of losses triggered, ironically, by another report from the ISM, that of its closely watched monthly factory survey released on January 2, which charged to a 20-year high.

The weaker-than-expected services data provided a handy excuse for a rally, even though the index showed expansion for a ninth straight month and subcomponents, including new orders, were strong.

Also on Tuesday, durable goods orders in the United States were revised up to show a 2.2-per-cent decline, compared with the initial report of a 3.1-per-cent drop.

Overall, November factory orders fell 1.4 per cent, broadly as expected.

Earlier, Treasuries were boosted by demand from Asian central banks hoping to stem the relentless slide of the US dollar. Traders reported buying from Asian accounts overnight.

"The talk is the Bank of Japan has been (intervening) in (the foreign exchange market) repeatedly, and the market just assumes much of the dollars bought will end up parked in Treasuries," said a trader at a US-based primary dealer.

That assumption was understandable, given the fact holdings of Treasuries by foreign central banks rose more than US$170 billion last year, to a record US$862 billion.

The market's next major hurdle is the December US payrolls report.

The ISM report's employment component eased to 54 from 54.9, but continues to suggest modest job creation.

Economists think the US added about 130,000 jobs in December, which continued the recent trend of monthly growth, but, given increases in the total US work force, that was not enough to pull the jobless rate down from 5.9 per cent.

A report from job placement firm Challenger, Gray & Christmas last Tuesday indicated the US continues to shed positions even as it adds jobs in some areas.

December layoffs were 93,020, down from 99,452 in November, but fourth-quarter cuts rose to 364,346, from 241,548 in the third quarter.

The 30-year bond rose 1-4/32, for a yield of 5.10 per cent, down from 5.18 per cent.

Five-year notes were up 16/32, to yield 3.24 per cent, down from 3.35 per cent. Two-year Treasury notes climbed 6/32 to yield 1.83 per cent.

Short-term rate futures remain confident the Federal Reserve will raise interest rates by the end of July, and that it will continue a tightening cycle.

Chicago Board of Trade 10-year note futures surged back above the 50-day moving average to encourage buying from technicians.

Major resistance lies between 112-05/32 and 112-10/32.

Agencies via Xinhua

(Business Weekly 01/13/2004 page2)