MW: Treasury yields sink as ADP and PMI disappoint
NEW YORK (MarketWatch) — Treasury yields plummeted at the beginning of the second quarter, following a weak ADP payrolls report, which investors took as a bad omen for the more closely followed nonfarm payrolls report set for Good Friday.
A falling manufacturing index along with a decline in auto sales stoked the downward trend, and cast serious doubts on whether the Federal Reserve will be able to hike interest rates soon as some Fed officials, including Richmond Fed President Jeffrey Lacker, have suggested.
Worries about economic weakness saw stock prices tumble Wednesday and Treasurys were boosted as investors fled to safety.
The yield on the benchmark 10-year Treasury note TMUBMUSD10Y, -3.60% dipped seven basis points to 1.864%, according to Tradeweb. The two-year note TMUBMUSD02Y, -4.22% yield declined 2.4 basis points to 0.535%. And the 30-year bond TMUBMUSD30Y, -3.07% yield fell seven basis points to 2.472%.
Bond yields move inversely to prices, falling as prices increase.
“If the nonfarm payroll data is as weak as the ADP, the Fed will be on hold for a potential rate hike for the rest of the year,” said Tom di Galoma, head of rates and credit trading at ED & F Man Capital Markets.
Some market watchers called for caution as ADP has been known to underestimate nonfarm payroll reports.
“Over the past 4 months, the ADP data has underestimated private sector payrolls by an average of 66,000, ranging from an underestimate of 130,000 in November to an underestimate of 17,000 in January,” said Thomas Simons, an economist at broker-dealer Jefferies LLC.
Low energy prices and West Coast port delays also weighed on the disappointing manufacturing index. And declining exports underscored the Federal Reserve’s concern over weak foreign demand and the negative effects of the strong dollar.
It remains hard to determine a clear long-term trend in the Treasury market based solely upon domestic economic data, as it has been coming in through mixed and uneven reports over the past few days, di Galoma said.
Low trading volumes in a short holiday week also made trading choppy and deprived the market of a clear direction this week.
To answer the question whether Wednesday’s price action will be sustained, investors should look no further than the European government bond market, where yields hit record lows on Wednesday as the buying frenzy continues.
The European Central Bank’s aggressive stimulus program remains the strongest undertone in the U.S. Treasury market, putting downward pressure on yields, di Galoma said.
According to di Galoma, this is a long-term trend that is expected to affect Treasurys for the next year and will put the Federal Reserve in a tough position for any future rate hike decision.
