Treasuries See Further Downside Following Service Sector Data

Extending the pullback seen over the two previous sessions, treasuries moved to the downside over the course of the trading day on Wednesday.

Bond prices saw initial strength but slid into negative territory in morning trading and spent the rest of the day in the red. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, rose 2.2 basis points to 4.290 percent.

The downturn by treasuries came following the release of a report from the Institute for Supply Management showing an unexpected acceleration in the pace of U.S. service sector growth in the month of August.

The ISM said its services PMI rose to 54.5 in August from 52.7 in July, with a reading above 50 indicating growth in the sector. The increase surprised economists, who had expected the index to edge down to 52.5.

The data added to recent concerns about the outlook for interest rates, as the report also showed an acceleration in the pace of price growth. The prices index rose to 58.9 in August from 56.8 in July

“The ISM Services Sector report underscores the resilience of the largest portion of the economy as the headline print came in higher than expectations, underpinned by a stronger new orders metric,” said Quincy Krosby, Chief Global Strategist for LPL Financial. “Unfortunately, the prices paid component moved in the wrong direction — similar to the higher prices paid in the manufacturing report–edging markedly higher.”

“This is certainly not good news for a data dependent Fed, as the immediate reaction in the Treasury market saw the ten-year Treasury yield jump higher while equities remain under pressure,” she added. “With oil and food prices also higher, this report points to a Fed whose job to quell inflation is certainly not yet quite finished.”

In other U.S. economic news, the Commerce Department released a report showing the U.S. trade deficit widened in the month of July.

The report said the trade deficit increased to $65.0 billion in July from a revised $63.7 billion in June. Economists had expected the trade deficit to rise to $65.8 billion from the $65.5 billion originally reported for the previous month.

The wider trade deficit came as the value of imports climbed by 1.7 percent to $316.7 billion, while the value of exports rose by 1.6 percent to $251.7 billion.

Looking ahead, trading on Thursday may be impacted by reaction to the Labor Department’s report on initial jobless claims in the week ended September 2nd.

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