Bond Report: Treasury yields tick higher on service sector strength and debt supply

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U.S. Treasury yields came off session lows on Tuesday after a mid-session debt auction and stronger-than-expected data from the service sector, two forces that helped to weigh on values for government paper.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, +0.72%  rose 1.6 basis points to 1.825%, while the 2-year note rate TMUBMUSD02Y, +0.77%  ended virtually flat at 1.546%. The 30-year bond yield TMUBMUSD30Y, +0.86%  rose 2.5 basis points to 2.305%. Bond prices and yields move in opposite directions.

What’s driving Treasurys?

Economic data underlined the U.S. service sector’s strength, viewed as a key factor in the overall resilience of domestic growth despite the trade-driven slowdown abroad.

The Institute for Supply Management’s nonmanufacturing index for December climbed to 55.0%, from 53.9% in November. Economists surveyed by MarketWatch, on average, expected a reading of 54.5%. In other data, the trade deficit narrowed in November to $43.1 billion, while factory orders retreated 0.7% in the same month. A reading of 50% or better indicates improving conditions.

Overseas, signs of stirring inflation pressures showed up in the eurozone. Prices across the economic bloc rose to a six-month high of 1.3% in December, up from the previous month’s 1%.

An influx of government debt supply helped add pressure to bond-market trading. The U.S. Treasury Department auctioned off $38 billion of 3-year notes to tepid demand, seeing a “tail” of 0.5 basis point. A tail is when the highest yield the Treasurys sold in the auction is above the highest yield expected when the auction began – the “when issued” level.

The flight-to-quality from the escalation of Middle East tensions has started to subside this week. Still, investors are keeping their eyes on the fallout from the U.S. airstrike against Iran top general Qassem Soleimani.

A leaked letter from an U.S. military official suggested the Trump administration was considering taking American soldiers out of Iraq, following demands by Baghdad that they leave the country. But Secretary of Defense Mark Esper said the U.S. wouldn’t pull out troops from Iraq.

What did market participants’ say?

“The service sector has been stronger more resilient against the economic drag generated by the ongoing trade war. This is a good reason to look at the general economic outlook with a degree of optimism, since U.S. economic activity is sourced roughly 10% from manufacturing and 90% from the service sector,” wrote Thomas Simons, senior money market economist at Jefferies.

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