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Bond Report: U.S. Treasury yields pull back as rate-hike bets ease

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U.S. Treasury yields retreated on Monday, as investors looked past another round of improving economic data from the pandemic-battered services sector amid questions whether traders who wagered on rate hikes were over their skis.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.702%

was at 1.706%, down from 1.721% on last Friday. The 2-year note yield
TMUBMUSD02Y,
0.164%

fell 1.6 basis points to 0.168%, while the 30-year bond yield
TMUBMUSD30Y,
2.367%

rose 0.7 basis point to 2.371%. 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, as more analysts pointed out 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 the rest of the world. We’re seeing it in the ISM numbers,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities, in an interview.

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