Treasury yields jumped to among the highest levels of this year on Wednesday after data showed the U.S. economy’s services sector continued to expand in August.
What happened
- The yield on the 2-year Treasury BX:TMUBMUSD02Y jumped 5.6 basis points to 5.022% from 4.966% on Tuesday. Wednesday’s level is the highest since Aug. 28, based on 3 p.m. figures from Dow Jones Market Data.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y advanced 2.2 basis points to 4.289% from 4.267% Tuesday afternoon. Wednesday’s level is the highest since Aug. 22.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y fell 1.8 basis points to 4.358% from 4.376% late Tuesday.
- Wednesday’s levels for the 2-, 10-, and 30-year yields rank among some of the highest this year.
What drove markets
Data released on Wednesday showed that the U.S. services sector expanded for an eighth straight month in August. An ISM barometer of business conditions at service companies such as restaurants and hotels improved to 54.5% in August from 52.7% in the prior month. Economists polled by The Wall Street Journal had expected the index to slip to 52.5%.
Meanwhile, the Fed’s latest survey of economic conditions, known as the “Beige Book,” showed the economy grew at a modest pace in July and August, bolstered by pent-up demand for leisure activities.
Boston Fed President Susan Collins said in prepared remarks on Wednesday that while officials “may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”
Markets are pricing in a 93% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 45.2%, up from 25.9% a month ago.
In other U.S. economic updates on Wednesday, the U.S. trade deficit widened in July to $65 billion and the final reading of S&P Global’s U.S. services PMI came in at 50.5 for August, down sharply from 52.3 in July.
Investors also noted that the government bond complex has been pressured by a burst of supply from the corporate sector, with $36 billion of high grade paper sold on Tuesday alone, according to Bloomberg — part of $120 billion of issuance due in September.
What analysts are saying
“ISM services is the only top tier data of relevance this week, and once the dust settles we expect investors’ attention will return to the corporate issuance calendar with the bearish implications that holds for Treasuries,” said BMO Capital Markets strategist Ben Jeffery. “We wouldn’t look to fade the selloff until 4.32% 10-year yields, given the momentum backdrop.”
