The Treasury market is definitely trading like the best days of the economic recovery may have already past. The latest clue to that is the ISM Services Index for June posted a 60.1 which indicates an expanding sector but it disappointed against a 63.5 expectation and 64.0 print in May. Higher prices, it seems, are being interpreted by the market as a  tax on consumption that will eventually slow the economy and as a signal to the inflation hawks on the Fed that higher rates may be needed sooner rather than later. For now, every little blemish on the economy is magnified and sending yields lower. We talk more about that below. Finally, in our podcast this week we sit down with Jon Acuff, New York Times bestselling author of seven books, including his newest release, Soundtracks: The Surprising Solution to Overthinking. Catch this entertaining episode for Jon’s unique blend of humor, honesty, and hope as it relates to changing your company’s culture.  The iTunes link can be found here and the Spotify here.


ISM Services Index Misses Expectations But Still Solid

Yesterday, the catalyst for sending yields lower yet again was the ISM Services Index which printed at  60.1 versus expectations of 63.5 and 64.0 in May (a record for the series). 50 represents the dividing line between an expanding sector and contracting one so 60.1 would normally be greeted positively. However, the market is in the mood to look for clouds on a sunny day so missing expectations and drifting lower gave traders a reason to bid up Treasury prices yet again.

The biggest pullback was in employment (-6.0 points), which contributed to the weaker business optimism number (-5.8 points).  One of the ongoing complaints among employers is the ability to find able-bodied workers to fill open positions and that looks to be at least partly the case here. With schools returning to normal schedules soon and augmented unemployment benefits expiring over the next few months, the tightness in labor supply should ease. Nevertheless, the Treasury market didn’t hesitate to bid up Treasury prices in the wake of the report with the thought that the best of the employment and economic numbers could well be behind us as fiscal and monetary stimulus start to be dialed back. The reaction in the Treasury market was notable as yields did break a multi-month resistance line dating back to yield lows in August 2020. We discuss this in more detail in the next section.


US Treasury 10yr Yield Breaks Below August 2020 Bear Trendline

If you are one of the many investors waiting patiently for yields to reverse and move higher you just lost one of your underpinnings of support for that thesis yesterday. Treasuries started the day in rally mode after the long, holiday weekend but after the miss by the June ISM Services Index yields fell even more dramatically. As the graph below shows, since the lows back in August 2020, yields had held above the bear trend line from that point in time. That is until yesterday when they fell decisively below that level.

Following the release of the ISM Services number the 10yr Treasury yield fell as low as 1.35%, the lowest since late February when yields were in a decided advance eventually peaking at 1.71% on March 31. With a break of the August bear trend, yields will likely drift from here and consolidate the latest move. There is no doubt, however, that given the recent price action that the market thinks the best numbers for the economy may already be in the books, and with a Fed that seems sensitive to inflation fears, looking for catalysts to drive yields higher is getting harder and harder to find.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.11 0.35 0.63 0.97 1.78 2.24
0.50 0.10 0.32 0.57 0.85 1.64 2.13
1.00 0.09 0.29 0.54 0.81 1.55 2.00
2.00 0.28 0.48 0.73 1.43 NA
3.00 0.68 1.36 NA
4.00 1.32 NA
5.00 1.28 NA
10.00 NA

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Published: 07/06/21 Author: Thomas R. Fitzgerald