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US government bonds rallied on Monday, reflecting mounting concern over decelerating economic growth in the US, after a survey on America’s factory sector showed activity was increasing more slowly than economists had expected.
The yield on the 10-year Treasury note fell 0.05 percentage points in New York dealings on Monday to 1.18 per cent, nearing a trough of 1.126 per cent hit on July 20.
The decline in the bond yield, which is one of the most important measures in setting global borrowing costs, came after the Institute for Supply Management said its purchasing managers’ index fell to 59.5 in July from 60.6 the previous month.
The gauge is based on a poll of industry executives, but is considered to be a strong proxy for output in the factory sector of the world’s biggest economy. While the reading was still “very strong” — and well above the 50 line that separates expansion and contraction — it suggested “peak growth and inflation might be behind us”, said Ian Lyngen, an analyst at BMO Capital Markets.
America’s data disappointment came after a similarly soggy report out of China. The country’s official factory PMI showed that factory activity grew in July at the slowest pace since early 2020.
Brent crude, the global oil benchmark, slid 4.3 per cent to $73.06 a barrel following the substandard economic news out of the US and China, the world’s leading oil consumers.
“The components of the [official PMI] revealed a broad-based softening, with output and new orders weakening and trade components in contraction,” said Mitul Kotecha, a strategist at TD Securities.
However, some analysts anticipate that there will be an uptick in interest rates as supply chain issues subside and US payroll numbers continue to rise.
“We don’t believe that this is where we will end the year and we do anticipate that interest rates will rise,” Leslie Falconio of UBS said. “Heading into December 2021 we’ll see a compression of this labour market slack that have we witnessed over the past several months as kids go back to school and employment subsidies subside.”
Other sovereign bonds also increased in price on Monday, sending yields lower. The 10-year UK gilt yield slipped 0.04 percentage points to 0.52 per cent, with the equivalent German Bund off 0.026 percentage points at minus 0.49 per cent.
Emerging concerns over slowing US growth also knocked into corporate credit markets last month, with the lowest-rated slice of corporate bond markets posting its first month of negative returns since March last year, according to ICE BofA indices.
In equities, US stocks lost momentum after the release of the ISM report. The blue-chip S&P 500 index closed 0.2 per cent lower, while the Nasdaq Composite rose 0.1 per cent, rallying after sliding 0.7 per cent on Friday.
Chinese stocks, meanwhile, rose after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.
Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful technology sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.
Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai and Shenzhen-listed blue-chip stocks rising 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. European equities also chased the gains in China, with the Stoxx 600 up 0.6 per cent — hitting a new intraday record high.
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