Updated from 11:42 a.m. ESTTreasury prices fell Monday, pushing yields on the 10-year note to their highest level since June 2004, as traders anticipated higher government interest rates and a note auction later this week. Longer-dated maturities were hit particularly hard, narrowing the gap between yields on 10- and two-year notes to as few as three basis point, the flattest the curve has been in weeks. Longer-dated maturities, such as the 10-year note and the 30-year bond, typically yield more than shorter-dated notes, because it's riskier to loan money for longer periods of time. But falling prices on the short end of the curve have lately pushed rates above those on the long end, causing an "inverted" yield curve, something that has been a reasonably reliable leading indicator of economic slowdowns in the past. Bond prices and yields move in opposite directions. Most recently, the benchmark 10-year note was down 7/32 to yield 4.71%, while the 30-year bond fell 20/32 to yield 4.70%. The two-year was little changed to yield 4.75% and the five-year edged lower 3/32 to yield 4.73%. The slide on the long extends last week's losses, which were encouraged by speculation that this week's economic reports will show expansion is sufficiently strong to encourage at least two more quarter-point rate hikes from the Fed. Interest-rate futures show 100% odds for a hike to 4.75% at the central bank's March 28 meeting, and 76% odds for another move at the May 10. Although the Commerce Department's monthly factory orders report is not closely watched -- consisting of the earlier-announced durable goods report plus nondurable goods orders -- Monday's better-than-expected data reaffirmed interest rate expectations. Orders for factory goods fell by 4.5% in January, the first decline in four months and the sharpest since July 2000. But the drop was not as severe as the 5.3% decline expected by Wall Street analysts, based on January's sharp fall in durables orders.
There was a 2.2% increase in orders for nondurable goods, and durables orders did not fall as sharply as first estimated. Durable goods orders fell by a revised 9.9% in January, up from the initial estimate of a 10.2% decline. The February payrolls report will be this week's most closely watched release, since the Fed has long said that it is watching employment growth for signs of wage inflation. David Ader, chief Treasury strategist at RBS Greenwich Capital, says his firm is looking for 180,000 jobs to have been added in the month, vs. consensus estimates for 210,000. "A print in this range ... would continue to suggest the FOMC has room to tighten rates at the end of the month and potentially again in May," he says. But he adds that housing is the other piece of the economic-strength picture, and that signs of housing softness have been "bond friendly." The Treasury is also expected to announce a $9 billion auction of 10-year notes in a reopening of last month's sale. The auction is expected to be held this Thursday, and it could weigh on Treasuries as traders sell older notes to make room for the new issue.