Bond Report: 10-year Treasury yield sees biggest drop in two weeks as manufacturing rebound slows


U.S. Treasury yields fell on Monday, after an indicator of factory activity showed the blistering growth in manufacturing from the depths of the COVID-19 pandemic may be starting to slow down.

What are Treasurys doing?

The 10-year Treasury note yield

fell 2.6 basis points to 1.606%, marking its biggest daily decline in nearly two weeks. The 2-year note rate

was steady at 0.160%. The 30-year bond yield

slid 1.5 basis points to 2.287%.

What’s driving Treasurys?

The Institute for Supply Management said the April reading of a manufacturing activity index came in at 60.7% in April, down from a 38-year high of 64.7% in March. Though the data still pointed to the continued growth among factories, it suggested shortages and supply-chain disruptions were weighing on businesses and the U.S. recovery.

Yields retreated on the disappointing data but it also exposed the increased pressure on companies to raise prices and pass the higher costs down to their consumers, an outcome that could add to the cocktail of inflationary forces that have frightened bond investors this year.

New York Federal Reserve President John Williams said he expected inflation to run above 2% for the rest of the year. Meanwhile, Fed Chairman Jerome Powell cited data showing the uneven economic impact from the COVID-19 pandemic.

See: Why supply-chain bottlenecks, price pressures may ease by year-end

Investors will remain focused on the nonfarm employment report at the end of the week. Economists are expecting close to a million job gains, adding to the signs of strength in the labor market.

Investors say a string of strong jobs reports could force the Fed’s hand, prompting the U.S. central bank to start laying the groundwork for a tapering of asset purchases.

So far, most senior Fed officials have said it remains too early to talk about withdrawing policy accommodation. But Dallas Fed President Robert Kaplan broke ranks last week, saying the central bank should discuss cutting back its bond-buying at the earliest opportunity.

What did market participants say?

“Low inventories are providing producers with strong pricing power right now, but this will fade as production capacity expands and inventories are rebuilt. At a consumer level, there is still too much slack in the labor market to support such a significant increase in prices,” said Thomas Simons, senior money market economist at Jefferies.

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