February 21, 2019 / 8:37 PM / 4 months ago

TREASURIES-Yields rise despite soft U.S. data; trade talk progress helps

(Recasts; adds new data reports; updates yields)

By Kate Duguid

NEW YORK, Feb 21 (Reuters) - Treasury bond yields rose on Thursday on news of progress in U.S.-China trade talks and as soft U.S. economic data was attributed to the abnormal factors of a federal government shutdown and the trade war.

Thursday’s U.S. data reports showed declining business spending, a contraction in manufacturing and a slowing labor market. Investors regarded the dramatic drops as side effects of political events that have been or will soon be resolved.

Beijing and Washington have started to outline commitments in principle on the stickiest issues in their trade dispute, marking the most significant progress yet toward ending a seven-month trade war, according to Reuters sources familiar with the negotiations.

The effects of the trade war showed in a report from the Commerce Department that said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.7 percent. Slower business spending could crimp economic growth.

“Based on survey data, uncertainty about the direction and duration of the trade war has been creating uncertainty and consequential delays in investment decisions,” wrote Ward McCarthy, chief financial economist at Jefferies.

The Philadelphia Fed said on Thursday its gauge of U.S. Mid-Atlantic business activity declined in February to its weakest level since May 2016, suggesting a contraction in the region’s manufacturing sector.

Investors cautioned against attaching too much significance to the number. “We read the sharp drop in February orders and shipments alongside a modest inventory build as likely reflecting the effects of the federal government shutdown,” wrote Michael Gapen, chief U.S. economist at Barclays Capital.

He said he expected a rebound in business conditions in March amid “largely stable forward-looking assessments.”

There was also bad news from the housing and labor markets. The National Association of Realtors said existing home sales dropped 1.2 percent in January to the lowest level since November 2015. In addition, the Labor Department reported that although the number of applications for U.S. unemployment benefits fell last week, the four-week moving average rose to a one-year high.

Following the weak data, JPMorgan trimmed its gross domestic product growth estimates for the fourth quarter, as did the Atlanta Fed, both to 1.4 percent.

The yield on the benchmark 10-year government note rose 3.8 basis points, last trading at 2.690 percent. The two-year government note was up 2.7 basis points at 2.529 percent and the 30-year bond yield was last up 4.9 basis points at 3.047 percent. (Reporting by Kate Duguid; Editing by David Gregorio, Richard Chang and Dan Grebler)

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