US Treasury prices rose on Thursday as indications of slowing growth helped to offset remarks by a Federal Reserve official suggesting that more rate hikes might be needed to curb growing inflationary pressure.
"Signs are mounting of a slower US economy to come," said Paul Mortimer-Lee, global head of market economics at BNP Paribas. "Housing statistics are looking grim, with implications for construction employment. Confidence is down, too, and the details of the Philadelphia Fed's May business outlook were soft."
While its overall monthly index was up, the Fed Bank of Philadelphia said manufacturing firms it polled for its May report had lower expectations for future orders. Employment growth also stalled, noted Philadelphia Fed senior economic analyst Michael Trebing.
Treasuries have swung like a pendulum this week. Prices rose on Monday and Tuesday, buoyed by signs of slower economic growth and subdued inflation at the producer level.
That two-day advance unraveled on Wednesday, however, when the government reported that consumer prices excluding volatile food and energy items rose more than expected in April.
That news bolstered the argument that the Fed could raise interest rates again in June. Late last week, fed funds futures reflected a less than a 40 percent chance of another quarter-percentage point rate increase next month. The April CPI aroused bond investors' ultra-sensitive inflation fears, boosting that chance to nearly 60 percent.
But the bond market pendulum swung back again on Thursday, with bond prices rising and yields, which move in the opposite direction, easing.
Benchmark 10-year notes jumped 19/32 in price, their yields easing to 5.08 percent, from 5.15 percent late on Wednesday.
"Yields are attractive," asserted Alan Skrainka, chief market strategist at Edwards Jones in St. Louis. "Investors are taking advantage of the selloff and they don't think the long-term outlook for inflation changed overnight."
But John Shin, senior economist at Lehman Brothers, tied the up and down bond market action on Wednesday and Thursday to a legitimate reaction to a bond-unfriendly inflation report on Wednesday and then a "reversion to the mean" on Thursday.
"This is just the natural volatility that comes with a very uncertain economic outlook and, consequently, an uncertain monetary policy outlook," Shin said.
Tom Atteberry, portfolio manager at Los Angeles-based First Pacific Advisors which has $2.3 billion in fixed-income assets under management, said volatility in stocks, gold and energy might have persuaded some investors to take some risk off the table and put it in shorter-term Treasuries.
At 3:30 pm two-year notes which respond to expectations for monetary policy, rose 1/32 and the yield dropped to 4.93 percent from 4.96 percent late on Wednesday.
At midday on Thursday, Richmond Fed President Jeffrey Lacker said that inflation expectations would make a pause in the Fed's rate increases less likely, briefly leaving fed funds futures priced to predict a 60 percent chance of a June rate hike.
Treasuries prices rose early on Thursday after the Labour Department said first-time jobless claims jumped to 367,000 last week, well above the median forecast of 319,000. However, Labour said 46,000 of those claims were due to the temporary, partial shutdown of government operations in Puerto Rico.