US treasury yields reverse course after dismal ISM report

The US Treasury yields tumbled on Friday after a strong jobs report and an unexpectedly weak reading of the services sector gave clashing views of the strength of the US economy.  Yields, which move in the opposite direction of prices, popped to three-week highs early in the trading session following a better-than-expected nonfarm payrolls report. Yet yields nosedived, taking the 10-year Treasury back below 4 per cent, after the Institute for Supply Management (ISM) said service sector employment plunged to 43.3 last month, the lowest level since July 2020. 

The index was at 50.7 in November. Jobs have become a focus for markets as investors look to anticipate the timing of the first interest rate cut by the Federal Reserve. Persistent strength in the labor market threatens to accelerate inflation, forcing the Fed to maintain or raise rates after its most aggressive rate-hiking cycle since the early 1980s. 

"I don't know how to classify this (ISM) report other than to say it was absolutely dismal," said Jeff Klingelhofer, co-head of investments for Thornburg Investment Management. "One data print is one data print but currently you have two very different reads into the employment side of the consumer equation.

" Futures markets whipsawed following the ISM report. Markets are now pricing in a 24 per cent chance that the Fed keeps benchmark rates at their current range of 5.25 per cent to 5.5 per cent at its March meeting, down from a 44 per cent chance seen shortly after the nonfarm payrolls report, according to CME's FedWatch Tool. Markets are pricing in a 71 per cent chance of a 25 basis point rate cut, up from a 53 per cent chance seen earlier in the day. Overall, markets see the Fed cutting rates by a total of 143 basis points by the end of the year, down from expectations of more than 160 basis points in cuts two weeks ago. 

Despite Friday's volatility, "markets are starting a new year and comparing their expectations with the Fed and with the data and saying there's a disconnect here," said Chris Gunster, head of fixed income at Fidelis Capital. "Now you're starting to see yields back up and we think we're going to see more of that as the year moves on." The yield on 10-year Treasury notes was down 2.3 basis points at 3.968 per cent. It is up approximately 20 basis points from its level at the end of December. The yield on the 30-year Treasury bond was unchanged at 4.135 per cent. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 5.1 basis points at 4.331 per cent. January 5 Friday 10:54AM New York / 1554 GMT Price Current Net Yield per cent Change (bps). 

(With Reuters inputs)