2-Year Yield Climbs To 5%, Highest Level Since January, After Bernanke, ISM Data
Treasury debt prices fell Tuesday, as data showing unexpected strength in the service sector supported the view of a rebound in second-quarter economic growth and pushed short-term yields to 5%.
A strengthening economy would probably deter the Federal Reserve from cutting interest rates this year, a growing view that led to heavy selling of Treasury debt in recent weeks.
“The market is going to probe lower until we find resistance,” said Dan Shackelford, a portfolio manager at T. Rowe Price. “If the Fed is going to be on hold, bonds at 5% looks pretty rich.”
The two-year yield, which is the most sensitive to changes in the market’s Fed outlook, reached 5% for the first time since January.
The benchmark 10-year note shed 11/32 in price to yield 4.98%, up 5 basis points from late Monday. Bond yields move inversely to prices.
Treasuries succumbed to early downward pressure amid negative sentiment toward bonds in overseas markets. Selling intensified after the service sector data from the Institute for Supply Management showed a surprise surge in business last month, undermining expectations of a rate cut this year by the Fed.
The ISM services index rose to 59.7, its best showing since April 2006 and above the highest market forecast.
The recent strong economic data, led by Friday’s May nonfarm payroll reading, have caused some of the staunchest Wall Street economists to scale back their forecasts of Fed rate cuts this year.
On Tuesday, Goldman Sachs dropped its forecast for the Fed to pare rates by 75 basis points this year. Merrill Lynch on Friday abandoned its call for the Fed to ease the benchmark federal funds rate to 4.25% by year-end.
Meanwhile, Fed Chairman Ben Bernanke was just balanced enough in his housing outlook to deprive the market of a catalyst to shake it out of its slump.
Bernanke said the housing slowdown would act as a drag on the economy for longer than first thought, but he balanced those comments with warnings on inflation, reinforcing bond investors’ concerns.