TREASURIES – Treasury yields fall on weak PMI data, rethinking the economy

(Reedited editorial, added comment in paragraphs 4-5, 10-11, prices updated at 10:47am ET) By Herbert Lash NEW YORK, Aug 23 (Reuters) – Treasury yields fell on Wednesday , after weak business activity in the US and Europe hinted at global disinflation as markets await possible clues as to how the Federal Reserve views interest rates ahead of their annual summit in Jackson Hole, Wyoming. US business activity neared stagnation in August, with growth the weakest since February as demand for new business in the huge services sector slowed. A bigger-than-expected slowdown in euro-zone activity this week contributed to a shift in what the market sees growth and inflation after government bond yields surged to a decade high this month on a flurry of robust US economic data. “What the market is beginning to confront over the past few days is that maybe we’ve got it all wrong,” said Thierry Wizman, global FX and rates strategist at Macquarie in New York, of the view that the US economy is exceptionally strong . “Lower inflation may come here, but we will achieve it against the backdrop of weak economic activity in Europe, particularly in China and possibly also in the US.” The 10-year Treasury yield fell 10.5 basis points to 4.223% , after hitting 4.366% earlier this week, a high for the benchmark bond last seen in November 2007. The two-year government bond yield, which reflects interest rate expectations, fell 9.2 basis points to 4.945% as it breached the 5% threshold. Prior to the release of the PMI data, yields on the 10-year bond had risen nearly 40 basis points this month as markets pondered where the optimal interest rate lies. The 10-year inflation-linked bond fell to 1.883% after rising over 2% in the past two days. “We are on a pause until interest rates decide whether the Fed will consistently hit its 2% target or whether it will move away from its 2% target and accept something higher,” said Steven Ricchiuto, US chief economist at Mizuho Securities USA LLC in New York. “You have this confluence of factors and you’re like, ‘Okay, maybe we need to raise interest rates, but how much higher do we need to be?'” he said. “The answer is that you’re going to settle around 4.5%.” According to CME Group’s FedWatch tool, the likelihood of a Fed rate hike increased when policymakers conclude a two-day meeting on Sept. 20 ahead of PMI data to 13.5% and then dropped to 11.5%. Futures have pushed back expectations of a rate cut next year and are now expecting the Fed’s overnight funds rate to stay above 5% by May 2024 after extending it to June earlier this week. Powell will address the economic outlook at the Jackson Hole Symposium on Friday at 10:05 am EDT (1405 GMT). A Fed official earlier issued some hawkish signals ahead of Powell. Richmond Fed President Thomas Barkin said the Federal Reserve must remain open to the possibility that the economy is reaccelerating rather than decelerating, with potential implications for the Fed’s inflationary war. Recent yield moves are not a sign of “inappropriate” market tightening, but rather a reaction to strong economic data, he said. The Treasury will sell $16 billion in 20-year bonds at 1 p.m., followed by $8 billion in 30-year TIPS on Thursday. 23 August Wednesday 10:47 New York / 1447 GMT Price Current Yield % Net Change (basis points) 3 Month Bonds 5.3 5.4623 0.000 6 Month Bonds 5.285 5.5055 -0.029 Two Year Bonds 99-164/256 4.9453 -0.092 3-year bond 99-66/256 4.6445 -0.103 5-year bond 98-234/256 4.3715 -0.108 7-year bond 98-20/256 4.3233 -0.110 10-year bond 97-44/256 4, 2253 -0.103 20-year bond 91-152/256 4.5233 -0.094 30-year bond 96-172/256 4.3241 -0.087 (reporting by Herbert Lash, additional reporting by Stefano Rebaudo; editing by Dhara Ranasinghe)