US yields rise after better-than-expected manufacturing report

May 1 – US Treasury yields rose from three-week lows on Thursday after a better-than-expected manufacturing report for April, which also showed that tariffs on imported goods were straining supply chains and maintaining elevated prices for inputs.

The Institute for Supply Management (ISM) said that its manufacturing PMI dropped to a five-month low of 48.7 last month, beating economists’ forecasts for a drop to 48.

The survey’s measure of prices paid by manufacturers for inputs rose to 69.8, the highest level since June 2022.

“It’s cold comfort that the ISM Manufacturing index came in better than expected. It’s more like it came in less bad than expected. The collapse of production and new export orders along with an increase in domestic orders suggests that costs are rising and activity is falling. That’s not a great combination,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Traders are balancing the risks that tariffs implemented by US President Donald Trump will slow growth and increase inflation, with higher price pressures potentially delaying when the US Federal Reserve is likely to resume interest rate cuts.

“What we’ve heard from the FOMC so far is that they want to prioritize inflation expectations in any case where there’s lower growth and stubbornly high inflation,” said Will Compernolle, macro strategist at FHN Financial.

Fed funds futures traders are pricing in a 58% likelihood of a rate cut in June, down from 68% earlier on Thursday, and only a 5% chance of a rate reduction at the Fed’s May 6-7 meeting, according to the CME Group’s FedWatch Tool.

Yields fell to a more than three-week low earlier on Thursday after data showed that the number of Americans filing new applications for unemployment benefits increased more than expected last week.

Friday’s employment report for April is expected to show that employers added 130,000 jobs during the month, while the unemployment rate held steady at 4.2%.

The labor market has remained relatively resilient, which has allowed the US central bank to keep interest rates on hold as it also watches for signs of a potential resurgence in inflation.

Yields surged early last month after Trump announced larger-than-expected tariffs on trading partners, but have fallen since he offered a 90-day pause on most tariff increases.

Traders are now focused on what deals will be reached between the United States and trading partners, and are watching for when the expected impact of the trade levies are seen in the “hard” economic data.

“If you exclude all of the sentiment surveys and the corporate earnings calls and what you would call anecdotal evidence, there’s nothing in the hard data flashing red that says the Fed has to cut rates right now. So, they’re waiting for any of these fears to channel into the hard data,” Compernolle said.

Trump said on Wednesday that he has “potential” trade deals with India, South Korea and Japan.

The yield on benchmark US 10-year notes was last up 5.6 basis points to 4.231% after earlier reaching 4.124%, the lowest since April 7.

The two-year note yield, which typically moves in step with interest rate expectations, rose 8.4 basis points to 3.705%. It earlier fell to 3.558%, also the lowest since April 7.

The yield curve between two-year and 10-year notes flattened by around 3 basis points to 52 basis points.

(Reporting By Karen Brettell; Additional reporting by Chuck Mikolajczak; Editing by Freya Whitworth Hardcastle and Will Dunham)