Bond Report: Treasury Yields Come Off Lows On Upbeat U.S. Economic Data

U.S. Treasury yields came off session lows on Friday after purchasing managers’ surveys showed a steady upturn in activity in the manufacturing sector, a sign that factories may be overcoming the trade-driven slowdown.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.15%  was virtually flat 1.772%, leaving it down 6.1 basis points for the week. The 2 -year note rate TMUBMUSD02Y, +1.57% was up 2.5 basis points to 1.628%, contributing to a 1.8 basis point gain for the week. The yield for the 30-year bond TMUBMUSD30Y, -0.44% fell 0.8 basis point to 2.223%,

What’s driving Treasurys

Signs of steadying economic activity in the U.S. helped buoy yields for government paper. IHS Markit said its U.S. flash manufacturing sector purchasing managers index rose to 52.2 in November from 51.3 in October. The Institute for Supply Management has also shown a similar improvement in their factory gauge since October.

Meanwhile the U.S. flash services sector purchasing managers index in November rose to 51.6 from 50.6. Any reading above 50 indicates improving conditions.

In other U.S. economic data, the University of Michigan reported that its consumer-sentiment index for November came in at 96.8, versus 95.7 in the prior month.

There was some sign of improvement in Germany’s manufacturing sector, but IHS Markit’s purchasing managers indexes for the euro area pointed to slow economic growth.

The U.K.’s economic performance was the worst since July 2016 with manufacturing and services PMI both coming in below 50 and below expectations. Britain faces a general election on December 12.

The 10-year German government bond yield TMBMKDE-10Y, -10.80% was down 3 basis points to negative 0.360%. Trading in German debt can serve as a proxy for haven demand within the eurozone, and often moves in sync with the Treasurys market.

On prospects for a U.S.-China trade deal, Chinese President Xi Jinping said Beijing wanted to work toward a phase-one agreement on the “basis of mutual respect and equality. Xi added that though China neither began nor wanted a trade war, China would fight back when necessary.

Meanwhile, legislation on Hong Kong that allows for the U.S. to rescind Hong Kong’s special status is now being passed to President Donald Trump, but it’s not clear if the White House will attempt to veto the bill to advance trade talks with China. With the bill seeing significant bipartisan support, a veto would likely be overturned, analysts said.

What did market participants’ say?

“U.S. manufacturing PMIs appeared to bottom out in October. It’s ticked up since then. It’s hard to know that was the bottom, but the marketplace, and especially the bond market, wants to believe that,” said Tim Magnusson, senior portfolio manager at Garda Capital Partners, in an interview with MarketWatch, referring to the Institute of Supply Management’s PMI indicator.

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