Yields rise as weak data lowers chance of 2019 rate hikes

NEW YORK: Yields on US Treasury bonds rose on Thursday morning after new data pointed to an economy slowed by the federal government shutdown and the ongoing trade war with China, decreasing the possibility of further interest rate hikes this year.

Thursday's reports showed declining business spending, a contraction in manufacturing and a slowing labor market. The results supported the pause in interest rate hikes the Federal Reserve signaled in January, although some investors said the dramatic drops were blips caused by the trade war and the shutdown.

On Thursday morning, the market had mostly priced out the possibility of another interest rate hike in 2019, with an 83.9 percent chance that rates will be at their current level in December, according to CME Group's FedWatch tool. That is up from 66 percent the previous month.

The Philadelphia Fed said on Thursday its gauge of U.S. Mid-Atlantic business activity declined in February to its weakest level since May 2016, suggesting a contraction in the region's manufacturing sector.

Investors cautioned against attaching too much significance to the number. "We read the sharp drop in February orders and shipments alongside a modest inventory build as likely reflecting the effects of the federal government shutdown," wrote Michael Gapen, chief U.S. economist at Barclays Capital.

He said he expects "a rebound in current business conditions in March amid largely stable forward-looking assessments."

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.7 percent. Slower business spending could crimp economic growth. Data for November was revised down to show these so-called core capital goods orders falling 1.0 percent instead of declining 0.6 percent as previously reported.

"Based on survey data, uncertainty about the direction and duration of the trade war has been creating uncertainty and consequential delays in investment decisions,"  wrote Ward McCarthy, chief financial economist at Jefferies.

The number of Americans filing applications for unemployment benefits fell last week, the Labor Department said on Thursday, but the four-week moving average rose to a one-year high, indicating a slow-down in the labor market.

The yield on the benchmark 10-year government note  had risen 3.4 basis points, last trading at 2.687 percent. The two-year government note was up 2.2 basis points, last at 2.525 percent. At the end of the yield curve, the 30-year bond yield was last up 4.2 basis points to 3.039 percent.