Durable orders slip 1.1% versus expected fall of 0.8%
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Treasury yields fell after weaker-than-expected durable goods figures gave further ammunition to traders doubting the Fed's story of "transitory weakness" in recent inflation numbers that could exacerbate the showdown between the central bank and the bond market on the need for further monetary tightening this year.
The yield on the benchmark 10-year Treasury note edged off 1.1 basis points to 2.135%, after having risen as high as 2.162% in early morning trade. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point.
The two-year note yield lost 0.4 basis points to 1.336%, while the yield on the 30-year bond, or the long bond, fell 1.9 basis points to 2.696%.
Durable goods orders fell 1.1% in May, more than the 0.8% drop expected by economists surveyed by MarketWatch. A volatile measure of sales of big-ticket items and a gauge of how busy factories are likely to be in the future, the data helped dim the outlook for a second-quarter rebound that could have alleviated the concerns of weakening inflation numbers over the past three months.
See: Orders for durable goods backslide again (http://www.marketwatch.com/story/orders-for-durable-goods-backslide-again-2017-06-26)
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"Durable goods orders were a disappointment today almost no matter how you slice it," Aaron Kohli, a fixed income-strategist for BMO Capital Markets, said in a note. "The data trajectory continues to be a boon for Treasury bulls."
Other economic data were no more uplifting. The Chicago Fed's National Activity Index, a gauge of economic activity and inflationary pressures, fell to a negative 0.26 from a positive 0.57 in April. Capital goods orders, a measure of how willing businesses are willing to invest in raising production, dropped 0.2%.
Fed Chairwoman Janet Yellen has dismissed the deterioration in consumer prices (http://www.marketwatch.com/story/fed-holds-interest-rates-steady-dismisses-first-quarter-slump-as-transitory-2017-05-03)as "transitory weakness," but bond bulls, for the most part, appear to have no faith in her remarks. The spread between the five-year and the 30-year note, one way to chart the yield curve, fell below a 100 basis points last week after oil prices officially fell into bear-market territory (http://www.marketwatch.com/story/crude-futures-hold-steady-after-falling-into-a-bear-market-2017-06-21). A narrowing of the yield curve could signal falling growth and inflation expectations.
Some investors have went as far as to say the ball is no longer in the central bank's court. Unless consumer prices reverse from their recent decline or overseas central banks turn off the tap of accommodative monetary policy, long-dated Treasury yields could stay stuck at current levels regardless of the Fed's plans to raise rates.
"The economic data has been really stable. Without a sudden rise in inflation or a change in the global rate structure, we won't see the 10-year or 30-year rates move," said Dominic Pappalardo, a portfolio manager at Mcdonnell Investment Management.
Traders also took a close look at the Fed speakers in the morning. The yield curve's flattening gained impetus from remarks made by New York Fed President William Dudley, a voting member, who reaffirmed his view (https://www.newyorkfed.org/newsevents/speeches/2017/dud170626)that central bankers should not only pay attention to inflation but also financial conditions. His remarks were interpreted as dovish as lending remains loose despite a tightening of monetary policy, according to the Chicago Fed's National Financial Conditions Index.
San Francisco Fed President John Williams, a non-voter, said gradual rate increases are necessary to prevent the economy from overheating (http://www.marketwatch.com/story/feds-williams-says-gradual-rate-hikes-are-needed-for-growth-2017-06-26). Tuesday's schedule will also be packed with talk from senior Fed officials, with most of the attention expected to fall on Chairwoman Janet Yellen's conversation on global economic issues in London.
(END) Dow Jones Newswires
June 26, 2017 16:30 ET (20:30 GMT)