2-year Treasury yield tumbles as economic data points to contracting economy

U.S. Treasury yields fell sharply on Thursday as traders digested a new round of poor economic data that pointed to a contracting economy.

The yield on the 10-year Treasury note dropped 6 basis points to 3.538%. The 2-year Treasury yield, the most sensitive to the Federal Reserve's monetary policy, was last trading at around 4.153% after falling by 11 basis points. Yields and prices move in opposite directions and one basis point is equivalent to 0.01%.

Yields declined sharply as a new round of economic reports signaled a potentially greater-than-expected economic slowdown. The Philadelphia Fed manufacturing index released early Thursday showed a much larger contraction than forecast this month, while jobless claims rose over the previous week (245,000, up from 240,000).

Elsewhere, investors contemplated what could be next for Fed interest rate policy. Most are expecting the central bank to announce another 25 basis-point interest rate hike after its next two-day meeting winds up on May 3.   

The Fed indicated at its last meeting in March that a pause in rate increases could be on the horizon, depending on the pace of economic data.

Since then, the latest consumer and producer price index reports in the U.S. have indicated that inflation is easing while remaining far above the Fed's 2% target. Globally, however, the picture has been less clear, with the U.K.'s latest inflation reading, published Wednesday, remaining stubbornly high.

Investors remain laser-focused on the Fed's rate hiking path and whether rates will stay higher for longer — a prospect which Fed officials, including Atlanta Fed President Raphael Bostic, have stressed in recent remarks..

"I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time," said Cleveland Fed President Loretta Mester on Thursday.