U.S. Treasury prices flipped lower following a surge in September services data, with the long bond leading lower while the two-year outperformed. Prices had been paring gains, grinding lower into the day’s second services sector report after an early push higher to Friday levels. Traders were eyeing the key technical 2.33% area on the 10-year. Ongoing chatter over who is being considered for the Federal Reserve chairmanship (including current head Janet Yellen, who speaks at 3:15 p.m. ET) has been moving markets over the past several days with talk ratcheting between perceived more hawkish or dovish candidates. Volatility has been added by talk of forgiving Puerto Rican debt and Spain’s contentious politics.
The 30-year yield recently traded near the high at 2.89% from a 2.8456% low, 2.8933% high and 2.872% close Tuesday. The 10-year yield was near 2.342% from an early 2.3017% low, 2.3455% high and 2.332% close. The five-year yield was near 1.932% from a 1.893% low, 1.9444% high and 1.923% Tuesday. The two-year yield was near 1.479% from a 1.4511% low, a recent 1.4952% high and 1.475% close.
The curve continued to steepen, with the two- and 10-year yield spread near 85.5 from 85.7 while the five- and 30-year yield differential was near 95.6 from 95.
CME Group fed fund futures traders bumped the odds of an at least 25 basis point rate-hike by the mid-December back up to flat near 83% from an earlier 77% and 43.7% a month ago. The probability of a follow-up hike by mid-2018 were edged up over 50% from about 18% a month back.
The September Institute for Supply Management (ISM) non-manufacturing Purchasing Managers’ Index (PMI) surged to a 12-year high at 59.8 (consensus: 55.5) from 55.3 in August and an 11-month low of 53.9 in July, versus a prior 16-month high of 57.6 in February.
Marc Chandler, chief currency strategist with Brown Brothers Harriman, pointed to comments overnight from DoubleLine Capital’s Jeffrey Gundlach, who said Minneapolis Fed President Neel Kashkari will get the chairmanship, added upside to the bond prices. He is seen as “among the most dovish members of the FOMC.”
New issues have come in as spreads have tightened to double digits amid solid demand for corporate paper. The Bloomberg Barclays IG index fell to 99 basis points (bps), from 100 bps Tuesday, marking the tightest since 2014. The Bank of Nova Scotia is selling benchmark five-year notes while there’s a $600 million five-year from Plains All American Pipeline. Earnings season kicks off late next week and issuance is expected to pick up once companies are out of their blackout periods.
The September final Markit Services PMI fell 0.7 points to 55.3 (consensus: 55.2), giving back about half of the 1.3 point rise to 56.0 in August (but up from the 55.1 preliminary September print). The 135,000 September ADP private payrolls rise just missed the 140,000 expected. The weekly Mortgage Bankers’ Association (MBA) applications index dropped 0.4% along with a 1.0% gain in the purchase index and a 1.8% drop in the refinancing index for the week ended Sept. 29.
Fed speakers include St. Louis President James Bullard at the local banking event at 3 p.m. followed by Yellen at 3:15 p.m.