TREASURIES-U.S. Yields Edge Higher After Manufacturing Data

In The News | July 3, 2023

Chuck Mikolajczak | Yahoo Finance

 

NEW YORK, July 3 (Reuters) – U.S. Treasury yields rose modestly in light trading on Monday, reversing course after briefly losing ground following economic data that showed the manufacturing sector continues to slump.

Yields moved lower after the Institute for Supply Management (ISM) said that its manufacturing PMI dropped to 46.0 last month, the lowest reading since May 2020, from 46.9 in May. The reading marked the eighth straight month below the 50 level, indicating contraction, the longest streak since the Great Recession from 2007 to 2009.

“Manufacturing has been in a recession and no respite is in sight. Weak orders will likely lead to weak production. Even if employment doesn’t fall, earnings continue to be at risk,” said Brian Jacobsen, chief economist at Annex Wealth Management in Elm Grove, Wisconsin.

But the decline was short-lived, and the yield on 10-year Treasury notes was up 3.9 basis points to 3.858%.

A separate reading on manufacturing from S&P Global for June came in at 46.3, matching an earlier preliminary reading, while May construction spending rose 0.9%, above the 0.6% estimate, as a severe shortage of inventory of single-family homes has spurred construction.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 107.9 basis points.

The spread had earlier reached its deepest inversion since 1981.

The yield on the 30-year Treasury bond was up 2.2 basis points to 3.876%.

Monday’s trading was set for an early close ahead of the U.S. Independence Day holiday on Tuesday, leading to thin trading.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 5.7 basis points at 4.934%.

Markets are still widely expecting the Federal Reserve to hike interest rates at its next policy meeting on July 25-26, with odds of a 25 basis point hike at 86.2%, according to CME’s FedWatch Tool.

Comments last week from several Fed officials, including Chair Jerome Powell, heightened the view that the central bank would raise interest rates at the end of the month after pausing its rate hike cycle in June.

While the economic data on Monday signaled a continued softness in manufacturing, it could also help tamp down high prices.

“The decline in economic activity will likely ease some of the inflationary pressures, making investors and central bankers less concerned about the risks of sticky inflation,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.248%, after closing at 2.208% on Friday.

The 10-year TIPS breakeven rate was last at 2.262%, indicating the market sees inflation averaging 2.3% a year for the next decade.

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As a subject matter expert, Brian Jacobsen, Chief Economist at Annex Wealth Management is often interviewed with individuals not affiliated with the firm. Annex Wealth Management does not have control over the content or opinions expressed by these unaffiliated parties.

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