US Treasuries suffer profit-taking on jobs hint
(Adds ISM data, updates prices)
By Wayne Cole
NEW YORK, Feb 1 (Reuters) - U.S. Treasury debt prices turned mixed on Tuesday as a slight slowdown in U.S. manufacturing activity was balanced by a pickup in hiring plans.
The Institute for Supply Management's activity index eased to 56.4 in January from a revised 57.3 in December. Analysts had looked for a dip to 57.0 and noted new orders slowed more sharply, perhaps dimming the outlook for growth ahead.
But bond bulls were restrained by a near 5-point jump in the employment index to 58.1. There has been little correlation between this measure and actual jobs growth in manufacturing, but the rise might still stir speculation of a healthy January payrolls report, due on Friday.
"The data are marginally positive for bonds. It shows a slight loss of momentum, and new orders are the weakest in quite some time," said Alan Ruskin, research director at 4CAST.
However, after initially rallying on the numbers, investors were quick to take profits and the benchmark 10-year note <US10YT=RR> eased 5/32 in price. Its yield ticked up to 4.15 percent from 4.13 percent.
There were no such profits to take in short-term debt, which has underperformed for months, and two-year yields <US2YT=RR> held steady at 3.27 percent .
In sum, the data did nothing to change expectations the Federal Reserve will raise interest rates when its two-day policy meeting ends on Wednesday, and the market is still pricing in rates of 3.0 percent by the summer.
"At 56 and change, the economy is strong enough not to stand in the way of the Fed removing accommodation," said Ruskin. "But once extreme accommodation is removed, (the data don't) make a compelling case to tighten much beyond that."
He thought the economic outlook was consistent with rates at 3.0 percent to 3.25 percent, but not the whole hog to neutral, which some economists see closer to 4.0 percent.
Still to come on Tuesday are auto sales for January, which could be supportive for bonds given analysts expect a marked slowdown after a steep, incentive-driven jump in December.
Median forecasts are that sales of North American-made cars slowed to an annual 5.2 million pace in January from 5.95 million the month before, while sales of light trucks hit 7.8 million from 8.69 million.
The five-year Treasury note <US5YT=RR>added 1/32 in price, nudging yields down to 3.69 percent from 3.70 percent. At the very long end, the 30-year bond <US30YT=RR> ran into some profit-taking after its recent meteoric rally and lost 9/32 in price. Its yield rose to 4.60 percent having finished at 4.59 percent on Monday, its lowest close since April 2003.
Long-term yields are still down 35 basis points since Christmas, while short-term rates have risen by almost as much, so dramatically flattening the yield curve.
This trend has been partly driven by the Fed's measured approach to tightening since it has reduced interest rate uncertainty, restrained inflation expectations and helped shove yield-hungry investors toward longer-dated Treasuries in a world of painfully thin credit spreads.
"Apparently the Fed's new policy of "transparency" has taken the shock value out of monetary policy," said Ethan Harris Chief U.S. economist at Lehman Brothers.
The Fed and business economists all seemed to have similar forecasts for growth and inflation, and the Fed had promised to forewarn the markets if there was any change of plan.
"This in turn implies reduced volatility, reduced risk premiums and greater willingness to extend duration and buy riskier assets," he said, pointing to the surprising drop in long-term Treasury yields.
