US Treasury prices slumped on Monday as upbeat earnings and better-than-expected factory data reduced fears of a double-dip recession, stoking a stock market rally and a sell-off in government bonds. The 30-year bond took the brunt of the selling. Its yield posted its biggest one-day jump in more than a week, which briefly pushed the gap between 30-year and 10-year yields to a record wide level.
The economy will muddle along but will avoid deflation and a double-dip recession," said Colin Lundgren, head of fixed income at Columbia Management in Minneapolis. US bank shares were boosted after European banks BNP Paribas SA and HSBC Plc reported strong earnings, offsetting some worries the global economic recovery may be stalling. The Institute for Supply Management said its index of national factory activity eased to 55.5, above analysts' forecast of 54.1. A reading above 50 indicates expansion.
Barometers of factory activity in a number of European and Asian nations including China also signalled slowing growth. Remarks from Federal Reserve Chairman Ben Bernanke on Monday reinforced the notion of steady short-dated yields and the US central bank sticking to a near zero rate policy into 2011. He told a group of state lawmakers that the economy continues to struggle due to high unemployment and a fragile housing market.
The low-growth and inflation outlook comes as the US government is still borrowing heavily to fill its budget gap as a result of the recession and government stimulus programs.
The US Treasury Department said on Monday it expects to issue $350 billion in net new debt in the July-to-September quarter and $380 billion in the October-to-December quarter. Benchmark 10-year notes were trading 14/32 lower in price to yield 2.96 percent, up from 2.91 percent late on Friday. The 30-year bond was down 1-14/32 in price to yield 4.07 percent, up from 3.99 percent on Friday.
The gap between the 10-year note and the 30-year bond touched an all-time wide of 112 basis points, reflecting worries over US growth and US fiscal problems, according to Reuters data. Two-year Treasury notes traded down 1/32 to yield 0.57 percent, not far above the record intraday low of 0.55 percent set on Friday.