TREASURIES-Recovery in U.S. manufacturing pushes yield curve steeper


By Kate Duguid

NEW YORK, Aug 3 (Reuters) - The Treasury yield curve steepened on Monday, an indication of improved investor sentiment, after an Institute for Supply Management (ISM) report showed that U.S. manufacturing activity rose to a 1-1/2 year high in July.

ISM said on Monday its index of national factory activity was 54.2 last month from 52.6 in June. That was the strongest reading since March 2019 and marked two straight months of expansion. New orders recorded were the highest since September 2018. Manufacturing accounts for 11% of the U.S. economy.

Monday's data runs counter to evidence last week that the U.S. economic recovery has slowed as COVID-19 infections have resurged across the country. Weekly applications for unemployment benefits have risen for the past two weeks. The sharpest contraction in U.S. gross domestic product since the Great Depression was also reported last week.

"We got a relatively strong ISM manufacturing print," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

"That pushes back against some of the narrative that was percolating last week, that the recovery is slowing. So this at least is consistent with a recovery, but a slow one. Whereas last week, it looked like there might be some pause or retracement in the recovery."

The long end of the yield curve was higher, with the benchmark 10-year yield US10YT=RR last up 2.3 basis points and the 30-year yield US30YT=RR last up 4.3 basis points. At the short end, the two-year US2YT=RR and five-year yields US5YT=RRwere up less than a basis point.

The spread between the two- and 10-year yields US2US10=TWEB, the most common measure of the yield curve, widened on Monday by 6.2 basis points to 44.5 basis points.

The move higher at the long end of the curve was also attributable to the start of a new month, Hill said. Traders rebalance portfolios at the end of the month, and often must purchase more long-dated bonds as their current holdings will have become one month younger. Buying pressure on Friday had eased by Monday, driving prices lower and yields higher.

The U.S. Treasury Department on Monday said it plans to borrow $947 billion in the third quarter as it anticipates the government continuing to need to spend heavily in order to reduce the impact of the coronavirus epidemic on the economy. Treasury yields were little moved by the announcement.

Additional details of Treasury's quarterly refunding will be announced at 8:30 a.m EDT (1230 GMT) on Wednesday.

(Reporting by Kate Duguid Editing by Nick Zieminski and Paul Simao)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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