10-year yield sinks below 4 percent

Treasury prices rise on forecasts for weakness in key manufacturing index; dollar extends gains.

June 1, 2005: 9:55 AM EDT

NEW YORK (CNN/Money) - Bonds rose Wednesday, extending the previous session's gains, ahead of a government report on manufacturing and the dollar also rallied.

The benchmark 10-year Treasury note gained 7/32 of a point to 101-11/32 to yield 3.96 percent, down from 3.98 percent late Tuesday. The 30-year bond jumped 16/32 of a point to 116 24/32 to yield 4.29 percent, down from 4.31 percent in the previous session. Bond prices and yields move in opposite directions.

Prices for the five-year note added 3/32 of a point to 100-24/32, yielding 3.71 percent, and the two-year note edged higher one tick to 99-28/32, yielding 3.56 percent.

Bonds ticked higher ahead of the release of the Institute for Supply Management's national manufacturing index for May, which is due shortly. Economists surveyed by Briefing.com forecast that the ISM gauge fell to 52.2 last month from 53.3 in April.

Manufacturing surveys conducted by Federal Reserve regional banks for New York and Philadelphia moved sharply lower last month, fueling speculation of a nationwide downturn in the manufacturing sector.

On Tuesday the Chicago region's Purchasing Manager's index posted a steep drop -- although that index is a broader measure of business activity rather than solely a manufacturing index.

The Fed could react to signs of a weak patch in manufacturing by re-evaluating its measured pace of interest rate hikes.

In currency trading, the dollar gained on concerns over European policy-making and economic reform in the EU.

The euro bought $1.2239, down from $1.2310 late Tuesday, while the dollar bought ¥108.54, up from ¥108.12 late in New York Tuesday.

"The market has become interested in European affairs and there is probably a certain amount of investors out there who question the long-term feasibility of the EU," Paul Mackel, currency strategist at ABN AMRO in London, told Reuters.

French voters rejected the EU constitution Sunday, and voters in the Netherlands are expected to reject the charter by a wide margin Wednesday.