US bond prices rally on weak stocks, Chinese data
U.S. Treasury prices climbed on Thursday as losses on Wall Street and data suggesting a slowing in Chinese manufacturing revived safe haven bids for bonds.
Chinese factory figures and an industry report showing weaker factory growth in the United States reduced bets that the Federal Reserve would accelerate its pace of reducing its bond-purchase stimulus. This notion helped to propel benchmark yields to their lowest levels in nearly six weeks.
China's Flash Markit/HSBC PMI fell to 49.6 in January from December's 50.5, showing a faster rate of decrease in new export orders and employment. A reading below 50 signals a contraction in the manufacturing sector of the world's second largest economy.
"We started the day in positive territory on the Chinese data, which was a bit concerning," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
(Read more: Chinese data's ripple effect on markets)
Bond investors are starting to look ahead to next Wednesday, when the Treasury will hold its inaugural auction of two-year floating-rate notes.
This is the first new type of U.S. government debt security since the introduction of Treasury Inflation-Protected Securities in 1997.
The debut of $15 billion in the two-year floating-rate note issue joins next week's fixed-rate supply of two-year debt ($32 billion), five-year notes ($35 billion) and seven-year debt ($29 billion).
In the meantime, the Treasury will sell $15 billion in 10-year TIPS at 1 p.m.
While the U.S. and Chinese manufacturing data fell short of expectations, a government snapshot of the domestic labor market was mildly encouraging.
The U.S. Labor Department said 326,000 workers filed for first-time unemployment benefits in the week ended Jan. 18, matching the median forecast among economists polled by Reuters.
"The recent bag of data have been mixed at best, but it's not enough to derail the Fed from tapering at each meeting this year. The data have to really roll over," R.W. Pressprich's Milstein said.
(Watch: Lew letter urges raising debt limit)
Fed policy-makers will meet next Tuesday and Wednesday and analysts anticipate they will decide to further shrink their third round of quantitative easing which is aimed to hold down long-term borrowing costs to help the economy.
In December, the Federal Open Market Committee pared its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion in January. The Fed's policy-setting group is expected by some analysts to cut its monthly purchases by another $10 billion at its upcoming meeting.
Some traders and analysts downplayed the rise in bond prices as trading volume has remained below-average due to holiday-shortened week and a lack of top-tier U.S. economic data.
"We squeezed some of the shorts out, but we have been largely stuck in a narrow range for 1-1/2 weeks,'' said Thomas Roth, executive director of U.S. government bond trading at Mitsubishi UFJ Securities USA in New York.
On the open market, benchmark 10-year Treasury notes were 24/32 higher in price with a yield of 2.783 percent, its lowest yield since December 3, 2013.
The 30-year bond rose 1 14/32 in price to yield 3.682 percent.
The long-dated maturity was also bolstered by the Fed's latest QE3 buy-back, where the central bank purchased $1.39 billion in Treasuries due 2038-2043.
On Wall Street, the three major stock indexes fell sharply in early trading with the Standard & Poor's 500 index losing 0.9 percent on the weak Chinese factory data.