U.S. Treasury yields pull back from intraday highs as rate-hike bets ease

U.S. Treasury yields retreated from their highs on Monday, as investors looked past another round of improving economic data from the pandemic-battered services sector amid questions whether bets on early rate hikes were overdone.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, 1.672% was at 1.718%, down from its intraday high of around 1.741%. The 2-year note yield TMUBMUSD02Y, 0.164% fell 1.2 basis points to 0.172%, while the 30-year bond yield TMUBMUSD30Y, 2.329% edged 0.3 basis point down to 2.361%. Bond prices move inversely to yields.

What’s driving Treasurys?

In economic data out Monday, the Institute for Supply Management’s services index provided a glimpse of how restaurants, hotels and other leisure sectors are recovering from the pandemic. The gauge jumped to its highest reading on record of 63.7% last month from 55.3% in February, with any number above 50% representing an expansion in activity.

The high reading of the ISM services index does not mean activity has hit a multidecade high, but rather points to the pace of the recovery in the services sector between the months of February and March.

The data shows services businesses are coming back after being dealt blows by the work-from-home and social distancing guidelines that arose from the COVID-19 pandemic.

Still, investors are seeing signs that the labor market and the U.S. economy is gaining steam. On Friday, the March employment report showed job gains of 916,000, well above the forecasts of economists.

Yet traders appeared to shrug off the positive economic data, which had been mostly anticipated. Some analysts argued that traders may have baked in too many rate hikes ahead of schedule.

Market participants are pricing in expectations for the Federal Reserve to lift rates by the end of 2022. But the majority of Fed officials don’t see a benchmark interest rate increase until after 2023, based on the Fed’s so-called dot plot.

What did market participants say?

“In the end when you look at it, vaccines are driving activity in the United States versus certain other parts of the world. We’re seeing it in the recent ISM and jobs data,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities, in an interview.

Faranello noted long end rates still have room to move higher should the economy continue to reopen more broadly in the coming months. On the shorter end, however, investors may be overestimating rate increase bets given the Fed’s focus on their new definition of full employment and letting inflation run above 2% for some time.

By: Sunny Oh