(Recasts; updates yields, adds analyst quote)
By Kate Duguid
NEW YORK, March 5 (Reuters) - Revived fears about the progress of U.S. trade negotiations with China muted an earlier jump in U.S. Treasury bond yields on a report showing business activity and spending jumped in non-manufacturing sectors in February.
The Institute for Supply Management report on the U.S. non-manufacturing sector showed companies in February placed the most new orders since August 2005, an indicator of robust health.
Its measure of business activity also jumped, to 64.7 last month compared with 59.7 in January. Yields initially rose as the strong data added to the chances of an interest rate hike in 2019.
“The non-manufacturing ISM is one of the highest-quality indicators that you’ll get, so we do take that as a real-time barometer that once again shows that U.S. economic growth isn’t rolling over. Has it softened? Yes. But it doesn’t look like we’re heading towards a recession,” said Matt Toms, chief investment officer, fixed income at Voya Investment Management.
The 1-2 basis point gains earlier in the day were mostly erased by the resurgence of concerns over trade. U.S. Secretary of State Mike Pompeo said President Donald Trump would reject any trade deal with China that was not perfect, but added the United States will keep working on an agreement.
In addition, Trump looked set to open a new front in his trade wars with a plan to end preferential trade treatment for India that allows duty-free entry for up to $5.6 billion worth of its exports to the United States.
Yields earlier were also buoyed by strong earnings from Target Corp, which encouraged investors to discount earlier reports of slowing U.S. retail sales.
Target’s earnings beat helped reverse some of the pall cast over the American economy by the Commerce Department’s report that December’s retail sales were the weakest since 2009. The retail sales number was delayed by the government shutdown and released in mid-February.
“There’s some skepticism that the retail sales report that we saw for December really was as weak as it appeared because we’ve seen such good earnings out of Target,” said Mary Ann Hurley, vice president, fixed income trading at D.A. Davidson.
The yield curve was steeper on Tuesday afternoon as shorter-dated yields rose, while longer-dated maturities fell. The two-year note yield was last up nearly half a basis point to 2.549 percent. The benchmark 10-year yield was last flat at 2.721 percent. The spread between the two, which is used to measure the steepness of the yield curve, was lower by 17 basis points. (Reporting by Kate Duguid Editing by Sonya Hepinstall)