US Treasury yields dip amid persistent weak manufacturing data

Treasury yields slide: US Treasury yields fell on Tuesday, with the benchmark 10-year note poised to end a five-day streak of gains, following reports of ongoing weakness in the manufacturing sector.

The Institute for Supply Management (ISM) reported that its manufacturing PMI increased slightly to 47.2 in August from July's eight-month low of 46.8. However, this figure remains below the neutral 50 mark, indicating contraction for the fifth consecutive month.

Brian Jacobsen, Chief Economist at Annex Wealth Management in Menomonee Falls, Wisconsin, commented, "The modest rebound in manufacturing from July's poor performance isn't very encouraging. The drop in new orders suggests a limited chance for a strong recovery in activity."

Jacobsen added, “The Federal Reserve is more focused on the labour market than on manufacturing. It would require significant weakness in the service sector to prompt the Fed to consider more than a 25 basis point rate cut, which seems unlikely at the moment.”

Labour data awaited this week

Investors are awaiting a slew of labour market data this week, culminating in Friday's crucial government payrolls report.

The yield on the benchmark US 10-year Treasury note fell by 5.7 basis points to 3.854 per cent. This decline followed a two-week increase in yields last week, driven by economic data that heightened expectations for a modest 25 basis point cut by the Fed in its September 18 policy meeting.

Markets have largely anticipated a 25 basis point rate cut in the upcoming Fed meeting, with the likelihood of a 50 basis point cut rising to 37 per cent after the recent data, up from 30 per cent in the previous session, according to CME's FedWatch Tool.

The yield on the 30-year bond dropped 5.3 basis points to 4.143 per cent.

Recent remarks from Fed policymakers indicate broad support for a rate cut at the September meeting.

Yield curve and breakeven rates

The yield curve spread between two-year and 10-year Treasury highlights, an indicator of economic outlook, was at a negative 3.8 basis points.

The two-year US Treasury yield, which typically aligns with interest rate expectations, fell 3.7 basis points to 3.865 per cent, marking its most significant daily drop since August 23.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) stood at 1.984 per cent, down from 2.034 per cent on August 30.

The 10-year TIPS breakeven rate was at 2.112 per cent, reflecting market expectations of an average inflation rate of about 2.1 per cent per year over the next decade.

(With Reuters Inputs)