Bonds Drop as Data, Equities Improve – 10-Year 1.77%

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U.S. Treasuries turned lower Monday as manufacturing data improved and equity markets headed higher. St. Louis Federal Reserve President James Bullard reiterated that one 25 basis point rate hike was on the table as inflation and jobs data are near target levels, but he offered no hint on timing. Falling European bonds are adding drag while upcoming Treasury supply is also seen pressuring prices.

The 30-year was hit hardest, recently near 2.53% after trading to a high yield/low price 2.535% from a 2.49% close Friday. The 10-year is near 1.77% having also fallen to near Tuesday lows at 1.774% from a 1.738% close. The five-year has backed-off to the lowest levels in a week, near 1.27% from 1.245%. The two-year is also at week lows hitting 0.856% from a close at 0.8275%.

The curve trade was wound steeper with the yield spread between the two- and 10-years pushed over 92 plus form 91 Friday while the five- and 30-year yield differential has widened to 1.25 plus from 1.24.

Scheduled coupon offerings include $26 billion in two-year Tuesday, $34 billion five-years along with $15 billion two-year floating-rate notes (FRN) Wednesday and $28 billion seven-years Thursday.

The preliminary (“flash”) October Markit manufacturing Purchasing Managers Index beat at 53.2 versus 51.2 consensus, marking the highest level since last October.

The September Chicago National Activity index remained negative at -0.14 but rebounded from -0.72 in August (revised from -0.55) with growth remaining below trend.

Bullard said he anticipates the low-rate environment to persist and expects committee members’ will shift their long-term rate expectations lower.

Treasury will auction sell $42 billion three- and $36 billion six-month bills at 11:30 a.m. ET as well as $50 billion four-week bills Tuesday.

Fed Governor Jerome Powell is scheduled to moderate a discussion on the Treasury settlement process at 2 p.m. Chicago’s Charles Evans speaks at a local luncheon at 1:30 p.m.

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