(Adds comment in paragraph 4, 5) By Herbert Lash NEW YORK, June 5 (Reuters) – Treasury yields retreated on Monday after data showed new orders slowed in May, with a measure of prices paid by businesses for inputs falling to a three-year low, suggesting Federal Reserve efforts to tame high inflation are cooling the economy. The two-year Treasury yield, which typically moves in step with interest rate expectations, fell 3.1 basis points at 4.472%. Yields on all other Treasury debt of 10 years or shorter maturities fell. The Institute for Supply Management (ISM) said its non-manufacturing PMI fell to 50.3 last month from 51.9 in April. Though the PMI remains above the 49.9 level, which the ISM says over time indicates growth in the overall economy, the slowdown in May heightened the risks of a recession. When the ISM fell below 50 in early January it sparked a rally from 3.75% to 3.31% in 10-year yields, said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York. The January reading for the U.S. services industry was the first time it had fallen below the level for growth since May 2020. “We’re viewing the ISM services index as an important trigger,” he said. “As one of the key pillars of the expansion at this point, people have been looking very closely at the service sector and this is just another indicator that all might not be well with the economy.” Yields rose earlier on fears that the Treasury Department’s expected issuance of around $1 trillion in short-term debt to replenish cash reserves depleted during the debt ceiling impasse might induce an illiquid market. The new issuance gives money market funds the opportunity to buy bills instead of investing in the Fed’s overnight reverse repo facility, said Tom Simons, money market economist at Jefferies & Co in New York. “The markets broadly would probably not see too much of an impact from the debt issuance because of front-end investors moving money from one place to another,” Simons said. “But there is a risk that it does attract more investment from other areas or pull money out of the banks. There’s a lot of uncertainty.” A drop in liquidity may be an additional headwind for a market already battling restrictive interest rates, Glenmede said in a note. After the ISM data futures showed the probability of the Fed hiking interest rates at its policy meeting on June 14 fell to 22.9%, according to CME Group’s FedWatch Tool. The spread on the Treasury yield curve’s inversion, a recession harbinger when shorter-dated debt yields more than longer-dated debt, was at -78.3 basis points on the two- and 10-year yield curve . The yield on 10-year Treasuries fell 0.2 basis points to 3.691%, while the 30-year Treasury rose 0.7 basis points to 3.890%. The 10-year TIPS breakeven rate was last at 2.211%, indicating the market sees inflation averaging about 2.2% a year for the next decade. The Treasury sold $65 billion of three-month bills at a high yield of 5.22%% and $58 billion of six-month bills at a high yield of 5.25%. June 5 Monday 3:37PM New York / 1937 GMT Price Current Yield % Net Change (bps) Three-month bills 5.165 5.3167 -0.076 Six-month bills 5.235 5.4479 -0.056 Two-year note 99-149/256 4.4722 -0.031 Three-year note 98-166/256 4.1171 -0.025 Five-year note 99-28/256 3.8228 -0.019 Seven-year note 99-228/256 3.7679 -0.011 10-year note 97-100/256 3.6908 -0.002 20-year bond 97-196/256 4.0391 0.001 30-year bond 95-84/256 3.8904 0.007 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 16.75 -1.75 spread U.S. 3-year dollar swap 11.00 -1.50 spread TU.S. 5-year dollar swap 6.25 -1.75 spread U.S. 10-year dollar swap 3.50 -1.50 spread U.S. 30-year dollar swap -39.75 -1.25 spread (Reporting by Herbert Lash; Editing by Hugh Lawson and Richard Chang)
