October 3, 2019 / 3:06 PM / 15 days ago

TREASURIES-Gloomy U.S. data sets yields falling for sixth straight day

NEW YORK, Oct 3 (Reuters) - Treasury yields were negative for the sixth straight session on Thursday, with the two-year yield at its lowest since September 2017, after U.S. service sector growth hit its slowest pace in three years last month.

The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 52.6 from 56.4 the previous month. The reading was below expectations of 55.0 from a Reuters poll of 67 economists and was the lowest since August 2016. The survey of purchasing managers also showed that job growth in the largest slice of the American economy was the weakest in half a decade.

“To date, while the manufacturing sector has been weakening fairly consistently, the service sector parts of the economy have been holding up relatively well. If that second shoe is now dropping, that increases concerns about the global growth outlook,” said Michael Pond, head of global inflation-linked research at Barclays.

Yields across maturities were lower, with the two-year Treasury yield, which is a proxy for investor expectations of interest rate moves, down 10.2 basis points to 1.382%, extending a 7.2 basis point fall a day earlier.

Expectations the Fed will cut rates by 25 basis points from its current target rate of 1.75%-2.0% in October jumped to 94.6% on Thursday from 39.6% on Monday, according to CME Group’s FedWatch tool.

An October rate cut “is certainly a possibility but it is still not our baseline. But the Fed is certainly data-dependent and if that data weakens enough, then they will respond. That said, we do continue to see the Fed as reactive rather than proactive, which is why even though the market was pricing in a greater chance of Fed cuts, we are not seeing that translate into higher inflation expectations,” said Pond.

In a separate report, the Commerce Department reported that new factory orders slipped in August and business spending on equipment was much weaker than initially thought.

Thursday’s data comes on the heels of a survey from ISM on Tuesday, which showed a measure of national factory activity tumbled to more than a 10-year low in September, as trade tensions between China and the United States has strained business conditions. National factory activity fell to 47.8 - a reading below 50 signals the domestic factory sector is contracting.

The benchmark 10-year Treasury yield was last down 6.8 basis points to 1.529%, with the 30-year bond yield last down 5.2 basis points to 2.036%.

Reporting by Kate Duguid; Editing by Dan Grebler

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