By Sunny Oh

Durable orders slips 1.1% versus expected fall of 0.8%

Treasury yields fell but regained some of the lost ground after weaker-than-expected durable goods figures gave further ammunition to traders doubting the Fed's story of "transitory weakness" in recent inflation numbers.

The yield on the benchmark 10-year Treasury note edged off 1.1 basis point to 2.133%, after having risen as high as 2.162% in the early morning trade. Bond prices move inversely to yields; one basis point is one hundredth of a percentage point. The 2-year note yield lost 1.2 basis point to 1.332%, while the yield on the 30-year bond, or the long bond, fell 2.1 basis points to 2.696%.

Durable goods orders fell 1.1% in May, more than the 0.8% drop expected by economists surveyed by MarketWatch. A volatile measure of sales of big-ticket items and a gauge of how busy factories are likely to be in the future, the data helped dim the outlook for a second-quarter rebound that could have alleviated the concerns of weakening inflation numbers over the last three months.

See: Orders for durable goods backslide again (http://www.marketwatch.com/story/orders-for-durable-goods-backslide-again-2017-06-26)

"Durable goods orders were a disappointment today almost no matter how you slice it," Aaron Kohli, a fixed income-strategist for BMO Capital Markets, said in a note. "The data trajectory continues to be a boon for Treasury bulls."

Fed Chairwoman Janet Yellen has dismissed the deterioration in consumer prices (http://www.marketwatch.com/story/fed-holds-interest-rates-steady-dismisses-first-quarter-slump-as-transitory-2017-05-03)as "transitory weakness," but bond bulls, for the most part, appear to have no faith in her remarks. The spread between the 5-year and the 30-year note, one way to chart the yield curve, fell below a 100 basis points last week after oil prices officially fell into bear market territory. A narrowing of the yield curve could signal falling growth and inflation expectations.

Other economic data were no more uplifting. The Chicago Fed's National Activity Index, a gauge of economic activity and inflationary pressures, fell to a negative 0.26 from a positive 0.57 in April. Capital goods orders, a measure of how willing businesses are willing to invest in raising production, dropped 0.2%. Later on, the Dallas Fed's Texas manufacturing Outlook Survey is set for release at 10:30 a.m.

Traders also took a close look at the Fed speakers in the morning. The fall in Treasury yields was accelerated by New York Fed President William Dudley, a voting member, who reaffirmed his view (https://www.newyorkfed.org/newsevents/speeches/2017/dud170626)that central bankers should not only pay attention to inflation but also financial conditions. His remarks were interpreted as dovish as lending remains loose despite a tightening of monetary conditions, according to the Chicago Fed's National Financial Conditions Index.

San Francisco Fed President John Williams, a non-voter, said gradual rate increases are necessary to prevent the economy from overheating (http://www.marketwatch.com/story/feds-williams-says-gradual-rate-hikes-are-needed-for-growth-2017-06-26).

(END) Dow Jones Newswires

June 26, 2017 10:07 ET (14:07 GMT)