Yields rise on strong data

Yields rise on strong data
By Jennifer Hughes in New York, Paul J Davies in London and,David Turner in Tokyo
Published: March 2 2006 02:00 | Last updated: March 2 2006 02:00 Copyright by the Financial Times

US Treasuries fell and yields rose yesterday, unwinding some of the inversion in the yield curve, after strong manufacturing data bolstered expectations for further interest rate rises.

The Institute for Supply Management's index of activity rose to 56.7 in February, above forecasts and up from 54.8 in January.

Earlier in the session, investors had shrugged aside benign inflation data that showed only subdued core price pressures in the personal consumption expenditures index.

The upbeat manufacturing data added to the market's conviction that the Federal Reserve will raise interest rates by another quarter-point when it meets later this month.

By midday in New York, yields on ten-year notes were up 3.9 basis points at 4.596 per cent. Two-year yields added 1.3bp to 4.704 per cent.

The stronger yield rises on longer-dated paper left 30-year yields about 13bp lower than two-year yields, a sharp correction from the 22bp spread seen last week.

UK government bonds rallied after the Debt Management Office saw strong demand for its first auction of 10-year bonds in more than a year.

The auction of 2016 gilts with a coupon of 4 per cent gained bids of more than two times the £3bn on offer. The bonds were sold at a yield of 4.19 per cent.

Ten-year yields in the secondary market slipped 2.4bp after the sale, to 4.155 per cent. But two-year gilts were hit by strong mortgage lending figures that lowered rate cut hopes. The yield was up 0.2bp to 4.304 per cent.

European government bonds were down after stronger-than-expected data on manufacturing activity. The purchasing managers' index rose to 54.5 in February ahead of the forecast 54.0 and up on January's 53.5. A reading above 50 indicates expansion.

The two-year Schatz yield rose 0.7bp to 2.998 per cent, while that on the 10-year bund was 3.8bp higher at 3.505 per cent.

The yield on the benchmark 10-year Japanese government bond rose 2bp to a four-month high of 1.600 per cent as expectations of an end to the Bank of Japan's quantitative easing policy continued to grow.