(Updated at 3:30 p.m. ET/ 2030 GMT)
By Chuck Mikolajczak
NEW YORK, Dec 1 (Reuters) -
U.S. Treasury yields dropped on Friday after comments from Fed Chair Jerome Powell fanned cautious optimism that the central bank was done hiking rates, while more weak data on the manufacturing sector underscored that the surprisingly robust economy remains fragile.
Yields extended declines after Powell said the risks of the Fed moving too far with rate hikes and slowing the economy more than necessary have become "more balanced" with those of not moving rapidly enough to combat high inflation.
"The market will read what it wants into these things, but when you look at Powell's comments, he was balanced. The fact that he's balanced as opposed to raising rates, you can say, ‘oh, these guys want to cut rates’ and I think they do want to cut rates," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA in New York.
"I just don't think the data is going to allow them."
The market is pricing in a 66% chance of a rate cut in March, according to CME's FedwatchTool, up from about 43% on Thursday.
Earlier in the session, yields had dipped after the Institute for Supply Management (ISM) said its manufacturing PMI was unchanged at 46.7 last month, below the 47.6 estimate of economists polled by Reuters. It was the 13th straight month the PMI stayed below 50, which indicates contraction.
The yield on the benchmark 10-year U.S. Treasury note fell 13 basis points (bps) to 4.261% and is down more than 27 bps for the week. The yield touched 4.211%, its lowest since Sept. 8.
Yields have fallen sharply in recent weeks, with the 10-year U.S. Treasury yield closing out November on Thursday with its biggest monthly drop since August 2011. Softening economic data have heightened expectations the Fed is done with hiking rates and investors are attempting to forecast the timing of the central bank's first rate cut.
Many Fed officials have refused to rule out the possibility of another hike should economic data change course. Earlier this week, Fed Governor Christopher Waller, seen as a hawk, flagged a possible rate cut if inflation continues to decline.
The yield on the 30-year Treasury bond declined 11 basis points to 4.404%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year notes , an indicator of economic expectations, was at a negative 34.4 basis points after rising to a negative 33.83, its shallowest inversion since Nov. 8.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 16 basis points to 4.557% after closing out November with its biggest monthly drop since March. The yield declined to 4.540%, its lowest since June 13.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.159% after closing at 2.176% on Thursday.
The 10-year TIPS breakeven rate was last at 2.227%, indicating the market sees inflation averaging about 2.2% a year for the next decade.
(Reporting by Chuck Mikolajczak; Additional reporting by Herbert Lash; Editing by Richard Chang and Lisa Shumaker)