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BOND REPORT : Treasury Yields Retreat A Day Ahead Of ECB Meeting

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07/24/2019 | 04:35pm EDT

By Sunny Oh

An auction for 5-year notes 'tailed,' a sign of tepid demand

U.S. Treasury prices rose Wednesday, dragging yields lower, amid signs of weakness in the eurozone's manufacturing sector, coming ahead of the European Central Bank's closely watched policy meeting. Investors also were faced with a tepid auction of 5-year notes.

What are Treasurys doing?

The 10-year Treasury note yield fell by 2.3 basis points to 2.052%. The 30-year bond yield retreated a 2.7 basis points to 2.580%. The 2-year note rate was down 1.3 basis points to 1.822%.

The German 10-year government bond yield fell 2.2 basis points to a negative 0.42%, a record low.

What's driving Treasurys?

Factory activity in the export-dependent eurozone continued to shrink. The IHS Markit purchasing managers' index for manufacturing in the eurozone fell to 46.4% in July, extending its steady retreat. Germany's manufacturing PMI fell to 43.1% from 45%, plumbing its lowest level since 2012, when the eurozone was in the throes of a major debt crisis. Any reading below 50% represents a contraction in economic activity.

The weak data come before the European Central Bank meeting on Thursday, with policy makers expected to open the door to easing measures later this year.

The latest round of purchasing manager surveys in the U.S. highlighted the divergence in the services and manufacturing sector's performance. IHS Markit reported its flash services PMI gauge for the U.S. rose to 52.2 in July from 51.5, while its factory PMI indicator fell to 50.0 this month from 50.6. In other data, new home sales rose 7% in June, running at annualized rate of 646,000 .

Later in the afternoon, the Treasury Department's sale of $41 billion auction of 5-year notes "tailed," a sign of muted demand. The tail is the difference between the highest yield the Treasury sold in the auction and the highest yield expected when the auction began -- the "when issued" level. Debt sales can influence trading for the outstanding market as investors make room for the fresh supply.

What did market participants' say?

"A disappointing set of European PMIs -- following the earlier pattern of weakness in manufacturing, only partially offset by resilient services -- dented any enthusiasm from planned trade talks between the U.S. and China and the U.S. debt deal yesterday," wrote Mark Chandler, a rates strategist for RBC Capital Markets.

"Manufacturing is slowing down a bit in the U.S. and in other places like Europe it's in contraction territory. It's really proving to be an environment where rates will continue to fall. It doesn't even appear to be the case that rates are too low anymore, with inflation coming down," Robert Tipp, chief investment strategist at PGIM Fixed Income, told MarketWatch.

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