Treasuries Fluctuate as Service-Sector Gauge Raises Growth Worry

  • Markit services PMI lowest since 2013, sparking market gains
  • U.S. bond index returns 2.7% in 2016 as stocks, oil decline

Treasuries fluctuated after a weak reading on service-sector growth cast doubt on the resilience of one of the bright spots in the U.S. economy.

Benchmark yields fell initially after Markit Economics reported the worst reading on U.S. service-sector activity since 2013. Its preliminary services purchasing managers’ index for February fell to 49.8 from 53.2 in January. Readings below 50 indicate contraction. Separately, new home sales fell more than previously forecast. Bonds pared gains as oil and stocks rebounded.

The reports raised questions about growth in the U.S. services and consumer sectors, which are seen as more resilient to tumbling energy prices than manufacturing. The concerns about growth were apparent in the yield curve. The gap between three-month and 10-year yields -- a recession indicator used by the Federal Reserve -- approached the narrowest since 2012 on a closing basis. Strategist David Keeble said the Markit PMI is more volatile than other indicators, but that the market is sensitive to signs of consumer weakness.

“This is supposed to be the strong part of the economy, so if that folds, we’ve got nothing to stand on,” said Keeble, New York-based head of fixed-income strategy at Credit Agricole SA.

2012 Level

Benchmark Treasury 10-year note yielded 1.72 percent as of 2:32 p.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 was at 99 3/32. The yield touched 1.53 percent this month, the lowest since August 2012.

The Treasury sold $34 billion of five-year debt Wednesday at the lowest yield at an auction of the securities since 2013. Indirect bidders, a class of investors that includes foreign central banks and mutual funds, purchased the second-highest share of any five-year auction on record as primary dealers bought the lowest share in available data.

The tumult in equities and rally in U.S. debt have caught Wall Street off guard once again. For the second straight year, strategists have kicked off the year by cutting forecasts for 10-year yields.

In 2015, a Treasuries rally sparked by global deflation concerns prompted strategists to cut median year-end yield projections by 0.41 percentage point in January and February. This year, the median prediction fell by 0.28 percentage point in the same period.

Treasuries have outperformed U.S. stocks this year, as concern that global growth is slowing weighs on relatively risky assets. Treasuries have returned 2.7 percent this year, according Bloomberg bond indices. The Standard & Poor’s 500 Index has lost 6 percent.

‘Market Chaos’

This year’s declines in stocks and oil have prompted traders to cut the chances they assign a Fed interest-rate increase by the end of this year. Derivatives markets imply a 40 percent chance the Fed will raise rates at or before its December meeting, down from 93 percent at the end of 2015, according to overnight indexed swaps data compiled by Bloomberg. The calculations assume the effective fed funds rate will trade at 0.625 percent after the next hike.

“The market is still in chaos,” said Will Tseng, a bond manager in Taipei for Mirae Asset Global Investments Co., which oversees $73 billion. “Safety assets are still necessary for my portfolio.”

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