Yields flat after mixed data; Friday jobs report in focus

NEW YORK: US Treasury yields were little moved on Thursday after weak US manufacturing data contrasted with strong overseas manufacturing numbers and US jobless claims data that beat expectations as investors tried to position ahead of Friday's US non-farms payrolls report.

Treasuries sold off in early trading with prices sinking after a report showed growth in China's manufacturing sector expanded last month at the fastest pace in nearly two years, and a measure of manufacturing in Britain far exceeded expectations, rebounding sharply after touching a three-year low in July.

The strong overseas data could ease fears among members of the Federal Reserve who have signaled international worries could keep US short-term interest rates low, analysts said.

Data also showed US initial jobless claims rose less than expected last week, reflecting continued strength in the labor market.

But Treasury yields surrendered gains after the release of the US Institute for Supply Management's manufacturing index, which contracted in August for the first time since February as new orders and production tumbled.

The conflicting manufacturing and jobs data prompted caution from traders, analysts said, and trained an even closer eye on Friday's jobs report, which Fed officials have said could weigh on their thinking about raising interest rates at their next meeting on Sept. 20-21.

"The scenario that the market is not ready for is for a strong number tomorrow and for the Fed to guide toward a rate hike in September," said Subadra Rajappa, head of US rates strategy at Societe Generale.

"The selloff this morning was probably positioning for that kind of a scenario and then we get weak data at 10 o'clock and then you see a reversal in the selloff and buyers come in."

Benchmark US 10-year Treasury notes were little changed from their late Wednesday close to yield 1.571 percent. Two-year notes were also little changed in price to yield 0.789 percent.

Fed funds futures showed investors see only a 24-percent chance of a rate hike, down from a 30-percent chance prior to the release of the ISM manufacturing data, according to CME Group's FedWatch tool.

Bets on a rate hike had risen since the release of July's stronger-than-expected jobs report, which showed US employers added 255,00 jobs during the month. That followed June's addition of 292,000 jobs.