By Min Zeng
Yields on benchmark 10-year U.S. government debt fell to a
two-month low on Monday as a disappointing manufacturing release
cast doubt on a rise in interest rate by the Federal Reserve in
September.
The monthly manufacturing index fell to 52.7 last month from
53.5. It followed Friday's release showing 0.2% rise in the
employment-cost index Friday, the smallest in three decades and
pointing to sluggish wage inflation.
The Fed's ultra-loose monetary policy following the 2008
financial crisis has sent prices of many stocks and bonds to
elevated levels, raising concerns about whether financial assets
could hold up once the Fed starts a tightening campaign for the
first time in nearly a decade.
Fed officials have said the timing for the first rate increase
since 2006 depends on how the economy performs. While the U.S.
economy picked up speed in the second quarter, Fed officials and
investors are grappling with sluggish global economic growth,
subdued inflation and highly accommodative monetary policy around
the globe. Over the past month, falling commodities and China's
stock-market turmoil have heightened concerns over the slowdown of
the world's second-largest economy and its potential knock-on
effect to the rest of the world.
The yield on the benchmark 10-year Treasury note fell to as low
as 2.168% on the manufacturing data, the lowest intraday level
since June 1. Yields fall as prices rise.
Monday's report "is just another data point in this two steps
forward one step back economy," said Larry Milstein, head of
government and agency trading at R.W. Pressprich & Co. in New
York. "On its own it does not move the timing of a September hike
to December, but combined with Friday's weak inflation report and
if we get a soft employment report on Friday, we could see the Fed
delay a rate hike."
In recent trading, the yield was 2.173%, compared with 2.207% on
Friday, according to Tradeweb.
The yield has dropped from this year's intraday peak of 2.5% set
in June. Falling commodities have reduced inflation expectations.
Inflation is a main threat to the value of longer-dated bonds as it
chips away bonds' fixed return over time. Concerns over China's
economy have also boosted demand for ultrasafe U.S. government
debt. Investors who expect the Fed to wait until December or later
to tighten also took advantage of recent higher yields to buy.
Monday's data underscore the challenges for the Fed to dial back
crisis-era monetary policy amid sluggish global economic growth,
subdued inflation and highly accommodative monetary policy around
the globe.
Money managers and traders say volatility in the financial
markets would rise leading into the September policy meeting as
economic releases will drive the Fed's rate policy outlook.
"We will go number to number from now on," said Thomas Roth,
executive director in the U.S. government bond trading group at
Mitsubishi UFJ Securities (USA) Inc. in New York.
This week's key data point will be the nonfarm jobs report due
on Friday. The U.S. economy is forecast to have added 215,000 new
jobs in July following a net gain of 223,000 in June, according to
the median forecast from economists polled by The Wall Street
Journal. The average hourly wages were forecast to rise by 0.3% in
July after being flat in June.
Many investors say a solid jobs report would bolster the case
for the Fed to raise the fed-funds rate in September. Money
managers and traders have migrated cash out of shorter-dated
Treasury notes and into longer-dated bonds to position for the
Fed's upcoming tightening cycle.
In the past three tightening cycles, the yield on the two-year
Treasury note rose at a faster pace than the yield on the 10-year
Treasury note. That is because shorter-dated bond yields are pinned
by the Fed's short-term policy rate so they are more vulnerable to
a shift in the Fed's policy.
Many money managers expect the 10-year yield to rise modestly
during the balance of this year, seeing it as a normalization of
the bond market in response to the Fed's shift away from ultraloose
monetary policy. But they expect the Fed's gradual approach in
tightening and contained inflation to keep a lid on a rise in the
10-year yield.
U.S. bond yields are higher compared with their counterparts in
many other developed countries, including Germany, Japan, the U.K.
and France. A stronger dollar boosts foreign investors' investments
in U.S. financial assets.
Write to Min Zeng at min.zeng@wsj.com