By Min Zeng
U.S. Treasury bonds pulled back on Tuesday as a strong U.S.
manufacturing release brightened the growth outlook and sapped
demand for haven bonds.
In recent trading, the benchmark 10-year note was 19/32 lower,
yielding 2.410%, according to Tradeweb. Yields rise as prices
fall.
Despite Tuesday's rise, the yield stays near the lowest level
since June 2013 and has fallen from about 3% at the start of the
year.
Bond prices hit session lows after the Institute for Supply
Management's manufacturing index rose to 59 last month from 57.1 in
July. Economists had expected the index to slide to 56.8.
"This was a very strong set of activity data which stand at odds
with consumer spending weakness at the beginning of this quarter,"
said Rob Carnell, analyst at ING Bank. "This data continues to make
normalisation of monetary policy look sensible and the ongoing
rally in Treasurys hard to sustain."
Some analysts said the ISM is not sufficient to push the Federal
Reserve to bring forward the timing for the first interest-rate
increase. Fed Chairwoman Janet Yellen has cited tame wage inflation
as giving the central bank breathing room in keeping interest rates
near zero for an extended period of time.
Bond investors will zero in on Friday's non-farm jobs report for
August, a labor-market release that is among the key factors
influencing the Fed's monetary policy.
Another highlight this week is the European Central Bank's
monetary policy meeting on Thursday.
Speculation has grown over the past week that the ECB may take
further actions, such as launching a program to buy sovereign bonds
in the eurozone, amid signs of destabilizing consumer prices and
flagging economic growth.
Such expectations spurred a broad rally in the eurozone's
government bonds last month, sending the yield on the 10-year
German government bond below 1% for the first time on record.
On Tuesday, the yield on the 10-year German government bond rose
to 0.929%, reflecting some profit-taking ahead of the ECB's policy
meeting on Thursday.
U.S. bond yields offer superior value compared to lower yields
in Germany.
Given the high-flying market expectations, analysts and traders
said bond yields could rise if the ECB disappoints investors at
Thursday's meeting. Some analysts said the ECB may continue to
signal that the door remains open for the possibility to buy
sovereign bonds but may refrain from tapping the tool
imminently.
"I am a bit skeptical that the ECB will act as aggressively as
some anticipate, so I believe wait-and-see is the best approach,"
said Larry Milstein, head of government and agency trading at R.W.
Pressprich & Co. in New York.
Demand for ultrasafe U.S. government bonds has surged this year,
driven by uneven global economic growth, geopolitical tensions in
Ukraine and the Middle East, and ultra-low interest-rate policy
from major central banks.
The 10-year Treasury yield fell by about 0.21 percentage points
in August and closed at 2.334% on Aug. 28, the lowest closing level
since June 2013.
Write to Min Zeng at min.zeng@wsj.com