June 26, 2017 / 1:21 PM / in 6 months

TREASURIES-Prices gain on weak manufacturing data

    * Weak capital goods data boosts demand for bonds
    * Thirty-year bond yields lowest since November
    * Five-year, 30-year yield curve flattest since late 2007
    * Treasury to sell $26 bln two-year notes

    By Karen Brettell
    NEW YORK, June 26 (Reuters) - U.S. Treasury prices gained on
Monday after data showed that new orders for U.S. capital goods
fell unexpected in May, suggesting a loss of momentum in the
manufacturing sector halfway through the second quarter.
    The Commerce Department said non-defense capital goods
orders excluding aircraft, a closely watched proxy for business
spending plans, dropped 0.2 percent.             
    “The data is pretty bad,” said Thomas Simons, a senior money
market economist at Jefferies in New York.
    Benchmark 10-year notes             were last up 2/32 in
price to yield 2.137 percent, down from 2.144 percent late on
Friday. Thirty-year bond yields             fell to 2.70
percent, the lowest since Nov. 9.
    The yield curve between five-year notes and 30-year bonds
               fell to 94.60 basis points, the flattest since
late 2007.
    The yield curve has flattened in the past month as Federal
Reserve speakers including New York Fed President William Dudley
have indicated further monetary policy tightening is likely,
weighing on short- and intermediate-dated debt.
    Long bonds, by contrast, have been supported by concerns
about tepid growth and falling inflation.
    “Inflation is the key,” said Simons. “Until oil moves
meaningfully higher and people start to get convinced that
inflation is going to come back, this curve flattening is going
to continue.”
    Financial conditions have loosened in the past year despite
the Fed raising interest rates three times since December, which
is another reason to continue tightening, Dudley said in remarks
published on Monday.             
    San Francisco Fed President John Williams said on Monday
that a recent slowdown in U.S. inflation was mainly due to
one-off factors and should not prevent further increases in
rates.             
    The Treasury will sell $26 billion in two-year notes on
Monday, the first auction of $88 billion in new coupon-bearing
debt supply this week.
    The government will also sell $34 billion in five-year notes
on Tuesday and $28 billion in seven-year notes on Wednesday.

 (Editing by Meredith Mazzilli)
  
 
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