Treasuries Gain as Manufacturing Gauge Falls by Most in a Year

  • Yield curve flattens as long-dated U.S. debt leads advance
  • Two-year note yield declines for first time since last week

Treasuries rose, led by longer-dated debt, after a report showed U.S. manufacturing output unexpectedly fell last month by the most in more than a year, underscoring traders’ views that the Federal Reserve faces an uphill battle in raising interest rates.

The gap between yields on two-year notes, which are more sensitive to the outlook for Fed policy, and 30-year bonds, which are influenced by expectations for inflation and economic growth, fell for a fourth day. Data from the Fed showed a 0.3 percent March output drop at factories, while a separate report showed consumer confidence unexpectedly declined in April.

"The data have been consistently weak," said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade with the Fed. "It doesn’t surprise me that we’re going to lower yields."

Investor concern that low global growth and inflation will impact the U.S. economy has weighed on Treasury yields as the Fed looks to raise rates. The International Monetary Fund this week cut its world expansion forecast and warned of global stagnation. Atlanta President Dennis Lockhart said Thursday he will no longer push for a rate increase this month in light of weakening growth and still-low inflation.

The benchmark 10-year note yield fell four basis points, or 0.04 percentage point, to 1.75 percent, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 was at 98 27/32.

U.S. Yields

The two-year yield declined for the first time in six days, falling three basis points to 0.73 percent. The yield on the 30-year bond fell four basis points to 2.56 percent.

U.S. yields will remain low because of "weak data, the Fed not raising rates and negative rates globally," Remy said.

A separate report showed manufacturing in the New York region improved this month.

Global investors boosted demand for Treasuries as the U.S. auctioned $56 billion in notes and bonds this week, with U.S. debt yielding more than that of most other developed countries.

"You have cyclical conditions in the U.S. that are OK, but you have overseas conditions and easing everywhere else that kind of keeps the lid on 10-year yields," said Krishna Memani, who oversees $204 billion as chief investment officer at Oppenheimer Funds Inc. in New York, in Bloomberg Television interview. The 10-year yield will continue to trade in a range of 1.7 percent to 2 percent, he said.

Fed Outlook

Futures contracts indicate traders assign about a 50 percent chance that the Fed will raise rates this year and zero probability to an increase at the central bank’s meeting April 26-27. The calculation assumes the effective fed funds rate will average 0.625 percent after the next hike.

"The bar is going to be very high to change the market’s expectations of the April Fed meeting," said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer.

Policy makers held their benchmark rate unchanged last month, after lifting it from near zero in December. They also released projections indicating officials see the potential for two rate increases this year, down from a December forecast of four hikes in 2016.

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