Two-year notes gained the most in a week as traders bet the central bank will slash its benchmark rate by a half-percentage point next month, the third reduction this year. Yields have tumbled about 2 percentage points since mid-September, when the Fed started lowering rates to avert a recession amid a slumping housing market.
The report ``strongly corroborates people who have already been saying we're in recession,'' said T.J. Marta, a fixed- income strategist at RBC Capital Markets in New York. ``We're going to retest the lows in yields.''
The two-year yield fell about 11 basis points, or 0.11 percentage point, to 1.94 percent at 10:20 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield touched 1.837 percent on Jan. 23, the lowest since April 2004. The price of the 2 1/8 percent security due January 2010 rose about 1/4, or $2.50 per $1,000 face amount, to 100 11/32. Ten-year note yields fell 11 basis points to 3.54 percent.
The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, the lowest since October 2001, the last time the U.S. was in a recession, from 54.4 the prior month, the Tempe, Arizona- based ISM said. A reading below 50 signals contraction.
100 Percent
Traders now see a 100 percent chance that policy makers will cut their lending target a half-point to 2.5 percent at their next scheduled meeting on March 18, compared with a 68 percent chance yesterday, according to futures on the Chicago Board of Trade.
The gap between two- and 10-year note yields widened to about 1.6 percentage points, the most since September 2004, from 1.58 basis points yesterday. Shorter-maturity notes are more sensitive to Fed rate changes, while debt maturing in 10 years or more is influenced more by inflation expectations.
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