NEW YORK: Treasury yields traded flat on Friday after a report showed US factory activity gathered speed in early May to its highest level in more than a decade as manufacturers struggle to find raw materials and labor, a sign of possible higher prices ahead.
Data firm IHS Markit said its flash US manufacturing PMI increased to 61.5 in the first half of this month, a reading that was the highest since the survey was expanded in October 2009 to cover all manufacturing industries.
The IHS report is the latest news to show the US economy is roaring at the "highest" level or "largest" advance in some time, suggesting inflation is picking up more than the Federal Reserve would likely acknowledge, said Kevin Flanagan, head of fixed income strategy at WisdomTree.
"Does this (report) fall into 'maybe inflation is not going to be as transitory as the Fed thinks?' I would say 'Yes,'" Flanagan said.
The yield on 10-year Treasury notes was unchanged at 1.634%, well off a more than one-year high of 1.776% reached in late March.
Yields on nominal US Treasury debt and inflation-linked securities fell on Thursday after factory activity in the US mid-Atlantic region slowed in May from a record pace, casting doubt on how quickly the economy can continue to grow.
Minutes from the meeting of Fed policymakers released on Wednesday revealed a contingent within the US central bank that feels a discussion may start sooner rather than later about pulling back its accommodative monetary policy, Flanagan said.
The bond market's response to the FOMC minutes was telling, with yields on the 10-year Treasury note initially moving higher, he said.
The yield on the 30-year Treasury bond was down 0.2 basis points at 2.339% on Friday.
The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was 2.615%, after closing at 2.599% on Thursday, off its highest close in just over a decade of 2.752% that was reached earlier this week.
The 10-year TIPS breakeven rate was last at 2.455%, indicating the market sees inflation averaging 2.5% a year for the next decade.