US Treasuries rallied on Thursday, pushing two-year yields to a record low as faltering manufacturing growth and declining producer prices painted a bond-positive picture of a slowing economy and low inflation. Regional factory activity reports from the New York and Philadelphia Federal Reserve Banks showed manufacturing growth fell this month while US producer prices declined in June for a third straight month.
Bonds soared on revived concerns the recovery from the worst US recession since the 1930s was fizzling and on worries over a second dip into recession, raising the possibility of a second round of quantitative easing from the Federal Reserve. The data also came a day after the Fed shifted its view of growth and inflation downward and said it was considering additional steps to boost the US economy if the softening outlook took a noticeable turn for the worse.
"There are growing worries that the economic recovery could be stalling," said David Coard, head of fixed income sales and trading at The Williams Capital Group in New York. He added that "if inflation is tame and there is even the potential for deflation, then the longer end of the Treasury curve is in good shape and you will see yields go even lower."
The benchmark 10-year note was last up 14/32 in price, yielding 2.99 percent versus Wednesday's close of 3.05 percent. The two-year yield during the day fell as far as 0.58 percent, a record low, although the note finished the day unchanged in price with a yield of 0.62 percent.
The 30-year long bond rose more than a point during the session, but ended the day 27/32 higher to yield 3.98 percent versus Wednesday's 4.03 percent close. Ironically, the manufacturing and PPI figures overshadowed news that claims for jobless benefits fell to their lowest level in nearly two years. The PPI in particular appeared to raise the prospects of a deflationary spiral of lower prices, wages and business activity, which would most likely boost Treasuries further.
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