Treasuries Fall as Rising Manufacturing Costs Hint at Inflation

  • ISM index shows prices paid at highest since September 2014
  • Yields climb as S&P 500 equities index rises most in two weeks

Treasuries fell after a report showed U.S. manufacturers are paying higher prices for raw materials, a sign of upward pressure on inflation.

U.S. 30-year bonds, which are sensitive to the outlook for inflation and economic growth, led yields higher as stocks advanced the most in two weeks. The prices-paid component of the Institute for Supply Management’s manufacturing index climbed to 59 in April, the highest since September 2014 and more than the 52 forecast in a Bloomberg survey of economists. The Federal Reserve is looking for signs of accelerating inflation as it seeks to raise interest rates.

“This is the largest increase in prices paid relative to expectations that I can ever remember,” said Russ Certo, a managing director at Brean Capital in New York. “Some will translate this into a timeline of the Fed’s relevance and being behind the curve, and the bond market is getting hit as a result.”

The data come after Fed officials last week emphasized concerns about U.S. economic progress in their April policy statement and removed a reference to global risks. The Fed said growth in household spending had “moderated” since its March meeting, when officials lowered forecasts for 2016 rate increases to two from four, even as labor-market conditions improved.

The yield on the 30-year bond rose five basis points, or 0.05 percentage point, to 2.73 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield earlier dropped to 2.66 percent. The price of the 2.5 percent security due in February 2046 was 95 13/32.

Yield Curve

The benchmark 10-year note yield rose four basis points to 1.87 percent.

The gap between yields on two-year notes and 30-year debt, known as the yield curve, steepened to 1.93 percentage points, the most since Feb. 17.

“Inflation has become the mis-priced scenario,” said Glen Capelo, managing director and co-head of rates at Mischler Financial Group in Stamford, Connecticut. “Whether we get it or not, we have to now price for the scenario, so the risk-premium in the back end has to be higher, meaning steeper curves.”

Inflation Gauge

The 10-year break-even rate, a bond-market gauge of inflation expectations, reached the highest since July last week. The rate, which measures the difference between yields on 10-year notes and equivalent Treasury Inflation-Protected Securities, declined two basis points Monday to 1.69 percentage points.

Treasury yields rose even as data showed the pace of U.S. manufacturing growth slowed in April. The broader ISM manufacturing index declined by 1 point to 50.8, barely above the 50 level that indicates stagnation and less than the 51.4 median forecast in a Bloomberg survey of economists. A Markit manufacturing index fell last month to the lowest level since 2009.

Futures show traders assign a 12 percent probability that the central bank will boost borrowing costs by June, down from a 20 percent chance seen a week ago. They price in a 60 percent chance that at least one rate hike will occur this year.

Before it's here, it's on the Bloomberg Terminal.