U.S. Treasury yields slumped Thursday after an indicator of service sector activity suggested a key pillar of the American economy may be more vulnerable than thought.
What are Treasurys doing?
The 2-year Treasury note rate TMUBMUSD02Y, +1.12% , sensitive to expectations for Fed policy, tumbled 9.8 basis points to 1.384%, its lowest since Sept. 2017. The short-dated maturity marked its biggest daily drop in two months.
The 10-year Treasury note yield TMUBMUSD10Y, +0.16% fell 6.3 basis points to 1.531%, while the 30-year bond yield TMUBMUSD30Y, +0.22% slipped 4.7 basis points to 2.035%.
See: The yield curve is steepening, and that’s not good for investors. Here’s why
What’s driving Treasurys?
Investors dived into government paper after data underlined the deteriorating health of the service sector, a large chunk of the U.S. economy. Up to now, industries like finance, technology and construction have been largely insulated from the impact of import tariffs and slowing international trade, but Thursday’s data could suggest cracks are forming in a foundation of the U.S.’s expansion.
The Institute for Supply Management’s non-manufacturing gauge came in at 52.6%, its lowest reading since 2014, well below the 55.3% forecast from economists surveyed by MarketWatch. Still, any number above 50 reflects an expansion in activity.
Interest rate-cut expectations also jumped as a result. Traders on the fed fund futures market now foresee a 90% chance of a quarter point rate cut at the Federal Reserve’s meeting on Oct. 30.
In other data, U.S. weekly jobless claims came in at 219,000 for the week ending in Sept. 28. On Friday the U.S. Labor Department nonfarm employment report will command the attention of investors who will get a chance to size up the labor market’s strength.
See: Another poor U.S. jobs report would add to Wall Street gloom: Here’s what to look for
Meanwhile, Chicago Fed President Charles Evans told Bloomberg TV that he was concerned about the inflation outlook and Cleveland Fed President Loretta Mester said using monetary policy looking to boost unemployment could backfire by prompting more companies to automate their labor force. Fed No. 2 Richard Clarida is due to speak on Thursday at 6:30 p.m. Eastern.
What did market participants’ say?
“ISM (service sector activity) at 52.6 is a big decline, but in many ways is simply in line with the last two months of reports on ISM manufacturing,” said Jim Vogel, an interest-rate strategist at FTN Financial, in a note.
“The current rally raises a risk that buyers are responding to essentially the same trend seen two days ago, but wasn’t fully integrated into equities and currencies,” said Vogel.