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U.S. government bond yields fell sharply Thursday after a key reading of manufacturing activity for the month of December notched its biggest decline in a decade, following on from weaker factory data in major economies around the world.

The ISM Manufacturing Activity index fell to 54.1 points in December, well above the 50 mark that separate growth from contraction but well shy of the 59.3 tally in November and the 57.9 Street consensus. The index is now at the lowest since November 2016, led to the downside by an 11-point slump in new orders to 51.1 from 62.1 and a 2-point slide in employment activity, to 56.2 from 58.4.

"This is grim. The consensus always looked too optimistic, but this reading is at the bottom end of our range of expectations," said Ian Shepherdson of Pantheon Macroeconomics. "This makes us all the more convinced that a meaningful trade deal will be done over the next few months, but the manufacturing numbers will get worse before they get better." 

The ISM manufacturing index is now - after the five point drop - more or less in line with financial conditions. pic.twitter.com/Vg3Hq3LefQ

— Anders Svendsen (@SvendsenAnders) January 3, 2019

Benchmark 10-year U.S. Treasury bond yields fell 9 basis points to 2.583% following the data, while the Dow Jones Industrial Average extended declines to fall more than 532 points on the session to 22,811.4 points. In Europe, 10-year German bund yields, a proxy for regional risk-free interest rates, fell to a two-year low of 0.146%.

US 10-year bond #yield falls below 2.60%! pic.twitter.com/eIqpdb5dZr

— jeroen blokland (@jsblokland) January 3, 2019

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.5% lower at 96.32. 

"Growth appears to have stopped," one of the ISM respondents commented. "Resources still focused on re-sourcing for U.S. tariff mitigation out of China."

The U.S. data followed a key private reading of manufacturing activity in China on Wednesday, the Caixin-Markit PMI, showing a slip the 50 level for the first time in 19 months, according to data published Wednesday, as similar activity gauges around the region showed associated weakness over the month of December.

Europe's key manufacturing sector also closed out 2018 on a weak note, with the IHS Markit assessment published Wednesday sliding to the lowest level since February 2016 and activity in Germany slipping to a 33-month low.

"The last three months of 2018 saw manufacturers report the worst quarterly performance in terms of production since the second quarter of 2013," said IHS Markit's Chris Williamson. "Worryingly, current production levels were achieved only by firms eating into backlogs of orders received in prior months and a dearth of new orders means capacity will be cut back in coming months unless demand revives. December saw a third consecutive monthly drop in new orders."