US benchmark and long-dated Treasury yields hit their lowest levels in over two months on Monday on weak US economic data and a muted inflation outlook, while declines in short-dated yields were limited ahead of a key US jobs report. The data on factory output dampened expectations that the Federal Reserve will hike interest rates in September, while traders viewed a decline in oil prices to six-month lows as a disinflationary sign.
Continued concerns over China and Greece's economies also spurred some safe-haven bids for US Treasuries, analysts said. The Institute for Supply Management said its index of national factory activity fell to 52.7 in July from 53.5 the month before. The reading, although above the 50 mark that indicates expansion, was shy of expectations for a reading of 53.5, according to a Reuters poll of economists.
"I would assume that the odds of a September lift-off are fading fast," said Justin Hoogendoorn, fixed-income strategist at BMO Capital Markets in Chicago, with Monday's ISM reading just the latest in a string of weak US economic data. He added that longer-dated Treasuries benefited from the muted inflation picture. Inflation tends to hurt demand for longer-dated Treasuries since it erodes the value of interest payouts.
US 30-year yields hit 2.85 percent, their lowest level since May 29, while benchmark 10-year yields hit 2.14 percent, their lowest since June 1. Short-dated Treasury yields also dipped, with three-year yields hitting their lowest since July 9 at 0.96 percent. The move lower in short-dated yields was slight, however, which analysts attributed to traders' hesitation to make major bets ahead of Friday's US July jobs data. Economists expect US employers to have added 223,000 jobs last month, according to a Reuters poll.
Short-dated yields are considered most vulnerable to the Fed's rate hikes. "The jury is still out somewhat on what the data will look like between now and the next FOMC meeting" in September, said Boris Rjavinski, a strategist at UBS in Stamford, Connecticut, referring to the Fed's policy-setting Federal Open Market Committee.