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Treasury yields sink as weaker manufacturing data aggravates economic growth fears

A decline in U.S. government debt yields accelerated Thursday after a report on manufacturing activity fanned fears that U.S. economic growth is on track to slow over the coming year.

The yield on the benchmark 10-year Treasury note fell 8 basis points to 2.58 percent, while the yield on the 30-year Treasury bond dropped 5 basis points to 2.926 percent. The 5-year Treasury note yield lost 9 basis points to 2.40 percent, below the 2-year yield of 2.43 percent. Yields fall when bond prices rise.

Though government debt yields had fallen overnight, rates sank further after the Institute for Supply Management said its manufacturing index read 54.1 in December, down from 59.3 in November. Economists polled by Refinitiv expected the index to slip to 57.9 in December.

"Comments from the panel reflect continued expanding business strength, but at much lower levels," said Timothy Fiore, chair of the Institute for Supply Management, in statement. "Demand softened, with the New Orders Index retreating to recent low levels, the Customers' Inventories Index remaining too low — a positive heading into the first quarter of 2019 — and the Backlog of Orders declining to a zero-expansion level."

Though an ISM index print above 50 signals an expansion in activity, Wall Street appeared to heed the worse-than-anticipated data as yet another sign of impending slowdown in U.S. gross domestic production growth.

"It's worth noting that the report indicates a 54.3 reading has historically been associated with real GDP growth of 3.4 percent, so the outright level of the ISM gauge is not a disaster, but a 5-point decline in a single month is obviously something to worry about," wrote Stephen Stanley, chief economist at Amherst Pierpont. "This is the largest one-month drop since October 2001 in the aftermath of the 9/11 attacks."

Apple also rekindled worries of a slowdown in global economic growth. The company lowered its first-quarter revenue guidance on Wednesday. Chief Executive Tim Cook blamed a range of factors for the slowdown, including fewer iPhone upgrades and slowing sales in China.

U.S. Markets Overview: Treasurys chart

In a surprise letter to investors, Cook said the tech giant's first-quarter guidance had been lowered to $84 billion, down from the $89 billion to $93 billion range that had been forecast previously. The news prompted holiday-thinned currency markets to rush to safe haven assets, with the Japanese Yen soaring after the announcement.

"I think the fundamentals, the markets pretty much agree on: that we're probably slowing in terms of real economic growth, but we're not absolutely collapsing," said Jim Caron, bond manager at Morgan Stanley Investment Management. "When we exit quantitative easing and we move into quantitative tightening, and you get higher volatility, what price is an investor willing to pay for an asset that's going to have more variability in that price over time?"

"An investor needs to be compensated for that risk of higher volatility," he added.

Yields had risen off their lows earlier in the session after an ADP and Moody's Analytics survey found that job creation in December rose much more than expected. Companies added 271,000 new positions, blowing past estimates of 178,000 from economists surveyed by Reuters.