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US yields lower on manufacturing and labor data, debt deal progress



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Adds market activity, weekly trends

By Ross Kerber

June 1 (Reuters) -U.S. Treasury yields fell on Thursday on news of an extended drop in new manufacturing orders and lower labor costs, while a debt-ceiling bill advanced in Washington.

The trading continued several days of declines across the yield curve, reflecting growing optimism about the federal government's ability to pay its debts and lesser expectations of a rate hike by the U.S. Federal Reserve later this month.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 4.7 basis points at 4.343%, and is down roughly 30 basis points since Tuesday, after U.S. markets were closed on Monday.

The yield on benchmark U.S. 10-year Treasury notes US10YT=RR was down 2.9 basis points at 3.608%, while the yield on the 30-year Treasury bond US30YT=RR was down 2.3 basis points to 3.834%.

The 10-year yield hit an intraday low of 3.57% just after 10 a.m. Eastern time (1400 GMT) when the Institute for Supply Management said its Purchasing Managers Index (PMI) fell to 46.9 last month from 47.1 in April.

It was the seventh straight month that the PMI stayed below 50, which indicates contraction in manufacturing, the longest such stretch since the Great Recession.

ING Americas Head of Research Padhraic Garvey said the figure was the main market driver on Thursday, since it would reduce pressure on the U.S. central bank to raise interest rates at its meeting later this month.

"It means the Fed doesn't have to hike much," Garvey said.

In a similar vein, Labor Department data showed U.S. worker productivity slumped in the first quarter, though not as much as initially thought, and sharp downward revisions to labor costs last quarter and in the final three months of 2022.

The U.S. Senate was set to take up a bill to lift the government's $31.4 trillion debt ceiling, with just four days left to pass the measure and send it to Democratic President Joe Biden to sign, averting a catastrophic default.

A day ago, federal funds futures traders estimated a roughly two-thirds chance the Fed would hike rates at its June 13-14 meeting, but on Thursday afternoon they saw a 77% probability the Fed would leave rates unchanged, according to CME Group.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year Treasury notes US2US10=RR, an indicator of economic expectations, was at -73.7 basis points.

Results of the U.S. Treasury's $70-billion four-week and eight-week bill auctions on Thursday were mixed. The sale of four-week bills garnered enough demand with a high yield of 5.13%, much lower than at the auction of the same security last week, reflecting optimism that a debt limit resolution is imminent.

The U.S. eight-week bill sale fetched a high yield of 5.22%, up from the expected rate at the bid deadline, suggesting investors demanded a premium to hold the debt.

The 10-year TIPS breakeven rate US10YTIP=RR was last at 2.178%, indicating the market sees annual inflation averaging at that rate for the next decade.

The U.S. dollar 5 years forward inflation-linked swap USIL5YF5Y=R, seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.465%.


June 1 Thursday 3:29PM New York / 1929 GMT


Price

Current Yield %

Net Change (bps)

Three-month bills US3MT=RR

5.2275

5.385

-0.032

Six-month bills US6MT=RR

5.215

5.4298

-0.034

Two-year note US2YT=RR

99-211/256

4.3428

-0.047

Three-year note US3YT=RR

99

3.987

-0.051

Five-year note US5YT=RR

99-164/256

3.7044

-0.039





Seven-year note US7YT=RR

100-142/256

3.6594

-0.035

10-year note US10YT=RR

98-16/256

3.6083

-0.029

20-year bond US20YT=RR

98-132/256

3.9834

-0.035

30-year bond US30YT=RR

96-76/256

3.8339

-0.023





DOLLAR SWAP SPREADS




Last (bps)

Net Change (bps)


U.S. 2-year dollar swap spread

18.00

-2.25


U.S. 3-year dollar swap spread

11.50

-1.25


U.S. 5-year dollar swap spread

7.50

-0.50


U.S. 10-year dollar swap spread

3.00

0.25


U.S. 30-year dollar swap spread

-40.00

0.50










Reporting by Ross Kerber, Editing by Nick Zieminski, Will Dunham and Richard Chang

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