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Markets

Yield curve steeper on weak manufacturing, construction data

Index of national factory activity dropped 0.2 point to a reading of 48.1 last month. A reading below 50 indicates
02 Dec 2019
  • Index of national factory activity dropped 0.2 point to a reading of 48.1 last month. A reading below 50 indicates contraction in the manufacturing sector.
  • The US yield curve, measured as the difference between the yields on two- and 10-year Treasury notes, was at 21.60 basis points, up 5.6 basis points from Friday's close.

BOSTON/NEW YORK: The Treasury yield curve was steeper on Monday following two reports showing US factory activity and construction spending fell unexpectedly, sounding a cautionary note on the US economy despite a recent string of upbeat data.

The Institute for Supply Management (ISM) said its index of national factory activity dropped 0.2 point to a reading of 48.1 last month. A reading below 50 indicates contraction in the manufacturing sector, which accounts for 11% of the US economy.

In a separate report, the Commerce Department said construction spending dropped 0.8% as investment in private projects tumbled to the lowest level in three years. Data for September was revised to show construction outlays declining 0.3% instead of rising 0.5% as previously reported.

The US yield curve, measured as the difference between the yields on two- and 10-year Treasury notes, was at 21.60 basis points, up 5.6 basis points from Friday's close.

The steepening was driven primarily by a dip in the two-year yield, which retraced most of the early morning's gains on strong data out of China. It was last at 1.610%, up just 0.8 basis point on the day, and about 4 basis points off the session high it hit in early trade.

The two-year yield reflects market expectations of changes in interest rates, suggesting Monday's data could complicate the conversation at the Federal Reserve's policymaking meeting next week, without necessarily changing the odds of a cut in interest rates.

"This raises the stakes for the non-manufacturing and non-farm payrolls figures later this week, though we're highly doubtful even underwhelming reads would be sufficient to goad the FOMC into cutting rates in just nine days," said Jon Hill, US rates strategist at BMO Capital Markets.

The benchmark 10-year yield, which reflects the market's view of the broader state of the economy, largely shrugged off the reports and held most of its early gains. The 10-year yield was last at 1.828%, up 5.2 basis points on the day.

Tom di Galoma, managing director for rates trading at Seaport Global Holdings in New York, said the yield curve might steepen only a little bit more as rising rates on 10-year US Treasuries would attract more investors wary of low-rate European alternatives.

"I don't think we're going to see this continued move into tomorrow," he said of Monday's steeper yield curve.