Treasury01 Tom Tucci Ray Humphrey investors that had positioned

Treasury yields fall as economic data disappoints 

* Investors move out of equities and commods to bonds

 

* 5s, 10s, 30s yields all break below technical resistance (Updates comment, prices, rewrites throughout)

 

By Karen Brettell

 

NEW YORK, May 17 (Reuters) - U.S. Treasury yields fell through key technical resistance levels as weak data added to disappointment over the pace of economic growth and investors moved out of commodity and equities markets back into bonds.

 

Further gains are now seen depending on whether data continues to disappoint economic bulls. Continuing debate over the debt ceiling and heavy supply of corporate debt, however, may counter the rally before benchmark 10-year yields test the key 3 percent area.

 

Ten-year notes yields US10YT=RR fell by around 3 basis points to 3.12 percent breaking below resistance at yields of around 3.14 percent. The notes next face strong resistance at yields of around 3.05 percent.

 

"People still have to get used to lower growth outlook," said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.

 

U.S. housing starts and building permits fell in April while factory output slumped, showing the economy got off to a weak start in the second quarter, data showed on Tuesday.

 

Earnings reports from several retailers also showed that consumer spending is being hurt by higher costs for gasoline, food and clothing.

 

A weaker economic outlook is leading some investors to expect the Fed will need to retain loose monetary conditions for longer than some had expected.

 

If the economy cannot achieve sustained growth rates above 2.5 percent, that "will keep interest rates low and the Fed in an easy monetary policy position for a prolonged period," said Ray Humphrey, senior portfolio manager at Hartford Investment Management Co., which manages $159.6 billion in assets. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ To see a graph on April housing starts, click on r.reuters.com/suv59r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

 

POSITIONING BACK TO BONDS?

 

As data disappoints, investors that had positioned for higher Treasury yields are needing to cover their shorts, and in some cases they are also reallocating money to from commodities and equities back to bonds, said RBC's Tucci.

 

"A lot of the hedge fund community had been short Treasuries against other products, that's been a continual unwind," he said.

 

Countering this bid, many "real money" fund managers are selling bonds, giving some pause near the technical resistance levels.

 

Five-year notes US5YT=RR fell by around 2 basis points to 1.79 percent, below technical resistance at around 1.80 percent. Thirty-year bonds US30YT=RR yields dropped 4 basis points to 4.23 percent, below resistance at 4.24 percent.

 

Risks that yields may not hold below these levels are that investors will begin to doubt that lawmakers will reach agreement on cuts needed before the debt ceiling, which the Treasury hit on Monday, is raised.

 

Heavy corporate issuance expected this month could also weigh on yields.

Around $9 billion in high-grade corporate deals hit the market on Monday and corporate issuance heated up again with a dozen deals already in Tuesday's pipeline, half of them of benchmark size, according to IFR. (Additional reporting by Ellen Freilich; Editing by Chizu Nomiyama)