TREASURIES-US yields decline after manufacturing data as tariff deadline nears

Updates to afternoon U.S. trading

By Chuck Mikolajczak

NEW YORK, March 3 (Reuters) - Longer-dated U.S. Treasury yields fell on Monday, extending declines after the latest reading on the manufacturing sector, as a deadline for tariffs to be enacted by U.S. President Donald Trump draws closer.

Yields extended slight declines, with the benchmark 10-year U.S. Treasury note hitting 4.168%, its lowest since December 9, after the Institute for Supply Management (ISM) said its manufacturing PMI slipped to 50.3 last month from 50.9 in January, which had marked the first expansion since October 2022. A reading above 50 signifies expansion.

In addition, its measure of prices paid by manufacturers for inputs surged to 62.4, the highest reading since June 2022, and it was taking longer for materials to be delivered, suggesting tariffs on imports could dent production.

"The fact that the ISM Manufacturing index is above 50 is masking a lot of reasons for concern - it increased because supplier deliveries are slowing and prices are rising - that’s not a sign of strength," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"Tariffs are all the worry, and rightfully so. The sooner we can move on from tariffs, the better it will be for businesses, consumers, inflation, and growth.

Trump is expected to decide on Monday what levels of tariffs he will impose early on March 4 on Canada and Mexico amid last-minute negotiations over border security and efforts to halt the inflow of fentanyl opioids.

The yield on the 10-year Treasury note US10YT=RR was down 4.9 basis points (bps) to 4.18%.

Yields have moved lower of late, with the 10-year yield registering its biggest weekly decline since late November last week on renewed worries about U.S. economic growth and inflation as Trump shifted tariff deadlines on Canada and Mexico.

Investors are also bracing for the labor market impact from actions by the Department of Government Efficiency (DOGE) under Elon Musk.

The Atlanta Fed's GDPNow model estimate for growth in the first quarter was adjusted to a negative 2.8% on Monday, down from a 1.5% decline on Friday and a positive 2.3% as recently as Wednesday.

The yield on the 30-year bond US30YT=TWEB shed 5.2 bps to 4.463%.

A recent spate of softer economic data has also nudged up expectations the U.S. Federal Reserve may be more active in lowering interest rates.

Markets are pricing in 67 bps of cuts by the Fed this year, after earlier views saw the Fed reducing rates by less than 50 basis points.

St. Louis Federal Reserve President Alberto Musalem said on Monday he expects the U.S. economy to continue to expand this year, but recent weaker-than-expected consumption and housing data and reports from business contacts have raised concerns about possible risks to growth.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations, slipped 0.4 basis point to 3.991%.

Economic data from the Commerce Department showed construction spending dropped 0.2%, shy of the unchanged estimate of economists polled by Reuters, after an unrevised 0.5% increase in December, pulled lower by a decline in outlays on multi-family homebuilding.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 18.7 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.62% after closing at 2.621% on Friday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.367%, indicating the market sees inflation averaging about 2.4% a year for the next decade.