(Bloomberg) -- US government bond yields declined to new multi-month lows Monday after mixed results from a manufacturing survey fanned investor angst about slowing growth and oil prices fell.
The rally gained additional pace late in the session after President Donald Trump said there was no room left for a deal on Canada and Mexico tariffs ahead of their effective date Tuesday, while reiterating plans to double tariffs on Chinese imports to 20% from 10%. Stocks tumbled following Trump's comments.
Yields were lower by some 5 basis points for the two-year Treasury note, with intermediate benchmarks lower by at least 6 basis points that saw the five-year note join the front end in trading firmly below 4%. Shorter-maturity yields entered the sub-4% zone Friday for the first time since October as economic growth concerns intensified.
The rally was sparked by ISM manufacturing survey data for February, which showed an unexpected contraction in new orders and employment gauges, while a measure of prices paid by factories increased more than anticipated. Yields declined further as the US benchmark price for crude oil slid following a report according to which a production increase is in the works.
"The data is starting to show some weakness, and you are seeing a shift in risk assets and that's benefiting Treasuries," said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. "We came in and saw higher European yields and thought it might be a ugly day for Treasuries, but risk assets are wobbling and the long end is getting bought."
The Treasury market delivered the biggest gain in six months in February — with US stocks posting losses — as gauges of consumer sentiment and spending weakened, stoking wagers on Federal Reserve interest-rate cuts later this year.
The indicators are leading economists to trim their forecasts for first-quarter US economic growth. A running forecast compiled by the Federal Reserve Bank of Atlanta that slumped to -1.48% on Friday collapsed to -2.83% Monday.
Economic concerns have intensified amid President Trump's tariffs agenda and the elimination of federal government jobs. Fed policy makers are tasked with fostering full employment in the US economy, consistent with price stability. Inflation continues to exceed the central bank's 2% long-term target, however. St. Louis Fed President Alberto Musalem said Monday that rates should remain restrictive until progress toward the goal resumes.
The US 10-year yield declined 5 basis points below 4.16%, the lowest level since December, and remains near that level. In Treasury options, demand persisted for hedges against further yield declines. In one case, $27 million was spent on a wager that the 10-year yield would drop to at least 4.1% by late April.
Yields had begun the US trading day higher, influenced by even bigger yield increases in most European bond markets tied to the outlook for bond supply to increase to finance more defense spending.
Whether bond yields continue to decline may depend on February labor-market data to be released later this week.
"We need more data to see whether this is just a soft patch or something more pernicious," said James Athey, a portfolio manager at Marlborough Investment Management. "It's hard to argue that Treasuries are cheap, unless you know for sure that data is going to be weak."
(Adds tariffs and updates yields.)
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