NEW YORK - U.S. treasury bonds fell as Chicago's manufacturing index rose more than analysts had expected, overshadowing another indicator displaying lackluster economic growth.
At 11 a.m. EDT, the 10-year Treasury note was down $2.50 per $1,000 in face value, or 8/32 point, from its level at 5 p.m. Wednesday. Its yield, which moves in the opposite direction, rose to 4.91 percent from 4.87 percent.
The 30-year bond fell 14/32 point. Its yield rose to 5.03 percent from 5.01 percent.
The 2-year note fell 2/32 point. Its yield rose to 4.92 percent from 4.89 percent.
Yields on 3-month Treasury bills were 4.81 percent as the discount rate fell 0.02 percentage point to 4.68 percent.
The resulting selling pushed the 10-year yield through its psychological resistance level of 4.91 percent, its peak for this year, and it's now heading for heights not seen since mid-August. Bond prices and yields move inversely.
The May purchasing managers survey from Chicago's manufacturing sector took the markets by surprise midmorning Thursday, with a jump in the headline index to 61.7 from 52.9 in April. Wall Street had expected a mild rise to 54.0. A reading above 50 indicates an expansion in manufacturing activity.
"There's across-the-board strength in employment, production and orders," said Carl Lantz, fixed income strategist at Credit Suisse in New York.
The new orders subindex led the overall increase, powering to 71.1 from 56.5. Employment rose to 57.3 from 50.5.
Lantz said the only caveat for the market to keep in mind is that over the last three months, Chicago's reading has contradicted the national reading on manufacturing from the Institute for Supply Management.
Nevertheless, he said this latest figure is "consistent with the pattern of stronger-than-expected data over the past week."
This lends some support to the theory that U.S. growth may already have troughed this year, and is set for a rebound in the coming quarter. This would put the likelihood of a cut in interest rates by the Federal Reserve in cold storage. The Fed has kept its target rate at 5.25 percent for the past seven meetings, and Eurodollar contracts have slashed the odds of a cut by the end of the year to 36 percent from 60 percent at Wednesday's close.
This comes despite a sharp downward revision to the Commerce Department's first-quarter growth estimate, released early Thursday. Sharp cuts to the inventories figures helped pull overall growth down from 1.3 percent to 0.6 percent - the slowest rate since the end of 2002.
But this figure comprised an upward revision in consumer spending. What's more, a $4.5 billion drawdown in businesses' inventories only strengthens the likelihood of a rebound for growth in the second quarter, said Richard Gilhooly, director of fixed-income strategy for BNP Paribas in New York. He estimates that the rate could bounce back as high as 2.5 percent.
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Laurence Norman in New York and Brian Blackstone in Washington contributed to this report.
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