Treasuries Plunge Most in 3 Months as Factory Data Top Estimates

  • Yields surge as manufacturing shows signs of stabilizing
  • Bond-market inflation-expectation gauge rises for eighth day

Treasuries tumbled, with 10-year note yields rising the most since December, after a report on manufacturing exceeded forecasts in a sign of resilience for the U.S. economy.

Benchmark yields surged as gains in new orders and production led factory activity to shrink less than expected in February. A bond-market gauge of inflation expectations known as the 10-year break-even rate climbed for an eighth day. Two-year note yields rose to the highest in more than a month as investors added to wagers that the Federal Reserve will lift interest rates this year.

"The data suggests there isn’t a significant downturn under way that the market has missed, which was the prevailing fear," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "It’s a negative for the market.”

The decline comes after Treasuries returned 3 percent in the first two months of this year, as volatility in stocks and commodities fueled concern that slowing global growth may suppress the U.S. economy. Investors await the Fed’s March 15-16 meeting for hints about the path of interest rates. A Labor Department report March 4 is forecast to show the U.S. gained 195,000 jobs in February, according to a Bloomberg survey of economists.

Fed Wagers

The benchmark 10-year note yield rose nine basis points, or 0.09 percentage point, to 1.83 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data, the biggest increase since Dec. 14. The price of the 1.625 percent security due in February 2026 fell 26/32, or $8.13 per $1,000 face amount, to 98 6/32.

Two-year note yields rose seven basis points to 0.84 percent, the highest since Jan. 26. U.S. stocks rallied to a seven-week high and oil gained.

Derivatives traders see about a 50 percent chance the Fed will raise rates by September, up from a 27 percent probability assigned on Feb. 25, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next hike.

Manufacturing Data

The Institute for Supply Management’s manufacturing index climbed to 49.5 last month, the highest since September, from 48.2 in January, a report from the Tempe, Arizona-based group showed Tuesday. While the reading was just shy of 50, the dividing line between contraction and expansion, last month’s improvement corroborates other industry reports that suggest the manufacturing slump may be easing.

The report removes "one major pillar of the bearish world view," said John Briggs, head of strategy for the Americas in Stamford, Connecticut, at RBS Securities Inc., one of the 22 primary dealers that trade with the Fed. That argument focused on "weaker growth and inflation," he said.

Fed Bank of New York President William C. Dudley said earlier that he marked down his forecast for U.S. economic growth this year "very modestly."

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