Treasuries rallied strongly on Friday, pushing yields lower, after a duo of soft readings on US manufacturing activities added to concerns that the American economy is poised for a sharp slowdown in the first quarter.
Yield on the 10-year benchmark government bond fell as much as 5.2 basis points to a new 10-week low of 2.5782 per cent as investors ramped up bets that the weak economic data will prompt the Federal Reserve to keep rates on hold for longer this year.
The more policy-sensitive two-year bond yield also retreated, dropping 3.3 bps to 2.4275 per cent, the lowest level since January 4.
Treasury yields started moving lower on Friday morning after a gauge of manufacturing activity in New York grew at its slowest pace in nearly two years. They accelerated their decline less than an hour later as another more widely tracked report showed US industrial output rose by less than expected.
Industrial production — a gauge of output at factories, mines and utilities — rose just 0.1 per cent month-on-month last month, the Federal Reserve said. While that’s a bounce back from the 0.5 per cent decline recorded in January, it was short of the 0.4 per cent rise that the market had expected.
A breakdown of the report offered little to cheer about, with manufacturing production falling for a second straight month in February.
“Manufacturing data in this report tend to be choppy, which perhaps is due to seasonal adjustment (particularly in the automotive sector) or reporting difficulties,” said Joshua Shapiro, chief US economist at MFR. “In any event, most evidence concerning the manufacturing sector points to softer conditions, with decent domestic demand being countered by softer export growth.”
The weak run of economic data that have emerged since the start of the year had economists dialling back on their growth forecasts for the US economy this year. A ‘tracking estimate’ from the Atlanta Fed forecasts first-quarter growth at a rate of 0.4 per cent.
Expectations that slower growth will encourage the Fed to keep the brakes on further rate tightening are also driving a steepening to the back end of the so-called yield curve. The difference between 10- and 30-year Treasury yields rose to 42.41 on Friday, the highest level since November 2017.