Hot ISM services data sends yields higher

NEW YORK, Sept 6 – US Treasury yields were mostly higher on Wednesday, as earlier declines evaporated after economic data showed the services sector unexpectedly accelerated in August, with indications that inflation pressures remain firm.

The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing PMI rose to 54.5 last month, the highest reading since February and up from 52.7 in July, while a gauge of prices paid also increased from the prior month.

A reading above 50 indicates expansion in the services industry, which accounts for more than two-thirds of the economy.

The data raised concerns the economy remains resilient enough for the Federal Reserve to keep rates at higher levels for a longer period of time.

“At the end of the day, if these numbers continue to be elevated, I would just expect (the Fed) not to ease as quickly as I think they will,” said Tom di Galoma, co-head of global rates trading at BTIG in New York.

However, di Galoma still expects the economy to slow considerably next year and bring about a sharp drop in yields.

The yield on the benchmark US 10-year Treasury note on Wednesday rose 3 basis points to 4.298%. The yield has risen about 21 basis points over the past three sessions, its biggest three-day gain in about a month.

The yield on the 30-year bond fell 1 basis point to 4.367%.

Earlier in the day, Federal Reserve Bank of Boston President Susan Collins said that while there are signs of progress in cooling inflation, now is a time for the central bank to proceed carefully when it comes to its next monetary policy steps, noting that price pressures remain despite some signs of moderation.

Despite the stronger-than-expected ISM reading, the central bank’s latest “Beige Book” summary of surveys and interviews conducted across its 12 districts through Aug. 28 showed economic growth was “modest” in recent weeks while job growth was “subdued” and inflation slowed in most parts of the country.

Yields had risen sharply over the prior two sessions, with analysts citing a widely anticipated influx of corporate debt following the Labor Day holiday as exacerbating the climb.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 73.3 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, climbed 6 basis points to 5.029%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.277%, after closing at 2.275% on Tuesday, its highest close since August 24.

The 10-year TIPS breakeven rate was last at 2.306%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Sharon Singleton and Nick Zieminski)