Bonds undermined by US industrial output, sentiment
U.S. government bonds slipped on Friday, pulling yields off two-week lows, after industry and consumer sentiment reports bolstered hopes the economy might soon start to recover from the worst recession in decades.
The industrial output data dimmed the allure of safe-haven investments such as U.S. Treasuries, as did separate reports showing improved national consumer sentiment and a slower rate of contraction in New York state manufacturing this month.
"Economic releases weighed on prices a bit," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey, adding however that Treasuries "still had a pretty strong week overall."
Benchmark 10-year Treasury notes traded 11/32 lower in price for a yield of 3.14 percent, up from 3.10 percent late on Thursday. Friday’s losses ended a recovery from last week’s sell-off that lifted yields to a 5-1/2-month high of 3.38 percent. Benchmark yields overall gained about 15 basis points on the week.
Bond market sentiment had been improving since the end of last week’s quarterly refunding sales, which swamped the market with $71 billion in coupon securities, after a record $101 billion in auctions the week before.
Bonds have another week to consolidate before being hit by the next wave of supply to fund the U.S. administration’s fiscal deficit. There are no new Treasury auctions of coupon securities scheduled until the May 26 sale of 2-year notes.
The 30-year long bond <US30YT=RR> traded 14/32 lower in price with yields rising to 4.09 percent from 4.06 percent late on Thursday. Despite the day’s losses, the long bond posted its best weekly performance so far this year.
The New York Federal Reserve Bank’s "Empire State" general business conditions index, a gauge of manufacturing in the state, rose to minus 4.55 in May — its highest reading since August 2008 — from minus 14.65 in April. [ID:nN15177430]
It was hardly a stellar reading, but in current market conditions, investors have decided "less bad" means "good."
It was a similar story with the industrial output, which fell 0.5 percent in April, a more modest pace than in recent months and less than the 0.6 percent economists had expected.
Even though the fall in March was revised up to a 1.7 percent drop from the previously reported 1.5 percent dip, the 0.5 percent decline in April was not as bad by comparison.
"It looks like a bottom in the manufacturing sector is at hand and that could be extrapolated into an eventual swing into positive territory as the inventory sell-off eases," said Pierre Ellis, senior economist at Decision Economics in New York. "The Fed will be cautiously optimistic about this report."
Separately, the Reuters/University of Michigan Surveys of Consumers said consumer sentiment rose in early May to its strongest since the September failure of Lehman Brothers, with rising expectations the economy may be in the last stages of the recession. The survey reading exceeded economists’ forecasts.
Two-year notes <US2YT=RR> traded unchanged in price for a yield of 0.86 percent. The two-year note also posted its best weekly performance so far this year, although yields held well within a range that has dominated since the Federal Reserve cut recommended overnight lending rates between banks to zero to 0.25 percent in December.
"The Fed has been on hold for such a long time and until there is any indications they are going to move, the front end is going to remain range bound," Canavan said.
Five-year notes <US5YT=RR> lost 6/32, lifting yields to 2.00 percent from 1.97 percent late on Thursday.
