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TREASURIES-Yields fall, retracing counterintuitive reaction to soft data

Kate Duguid

(Recasts, updates yields, adds analyst quote)

NEW YORK, March 4 (Reuters) - Treasury yields fell on Monday as the market retraced a counterintuitive move higher made Friday in response to weak economic data.

Yields rose on Friday in spite of soft U.S. manufacturing, personal income and spending data. The 10-year benchmark government yield, which serves as a proxy for the market's view on the overall health of the economy, rose 4.4 basis points on March 1. Monday's move lower was explained by analysts as a counter-reaction.

"The rally in (Treasury prices) occurred absent a new obvious fundamental driver, and likely partially reflected a slight retracement from Fridays sell-off, which itself occurred despite weak economic data on the day," said Jonathan Hill, U.S. rates strategist at BMO Capital Markets.

A report on personal income and spending from the Commerce Department on Friday showed inflation pressures remaining tame, with personal spending falling for the first time in more than three years. The release of this data was delayed by the partial government shutdown.

Also on Friday, the ISM manufacturing index slipped in February to its lowest level in two years as output and orders slowed.

Yields were also lower Monday in spite of positive developments reported in the U.S.-China trade talks.

U.S. President Donald Trump and Chinese President Xi Jinping could reach a formal trade deal at a summit around March 27 given progress in talks between the two countries, the Wall Street Journal reported on Sunday.

The two nations have imposed tit-for-tat tariffs on billions of dollars worth of each others' goods, roiling financial markets, disrupting manufacturing supply chains and shrinking U.S. farm exports.

"I think the market is ignoring some of the positive news overnight," said Gennadiy Goldberg, interest rates strategist at TD Securities.

Treasury investors have priced in some possibility of a deal already, he said, so "the market is waiting for a (U.S.-Chinese) deal to be signed, sealed and delivered until it prices in anything more."

The 10-year government yield was down 3.3 basis points, last at 2.722 percent. The 30-year bond yield was down 3.2 basis points to 3.091 percent and the two-year note yield was down 1.4 basis points to 2.545 percent.

In the week ahead, investors will be focused on several Federal Reserve speeches and the government's employment report on Friday. New York Fed President John Williams, who moved Treasuries in February when he suggested the central bank may need to reassess the way in which it sets its inflation target, will speak on Wednesday. Fed Governor Lael Brainard will speak Thursday and Fed Chair Jerome Powell will speak on Friday. (Reporting by Kate Duguid; editing by Steve Orlofsky and Jonathan Oatis)