MW: Treasurys slip after ISM's services-sector gauge
Divergence of opinions over where prices for government debt are headed
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices turned lower Tuesday, pushing yields up, as U.S. stocks rallied even after a report showed the non-manufacturing sector of the U.S. economy slowed in June.
Yields on the benchmark 10-year note (UST10Y 2.97, -0.01, -0.20%) rose 1 basis point to 2.99%. The yield touched 2.92% on June 30, the lowest in 14 months.
Yields move inversely to bond prices. A basis point is 0.01%.
Yields on 2-year notes (UST2YR 0.63, +0.00, +0.64%) increased 1 basis point to 0.65%, after having touched an all-time low around 0.59% last week.
Bond markets were closed Monday for Independence Day and bond-trading volume remained light on Tuesday, analysts said.
The Institute for Supply Management's services index fell to 53.8 after holding steady at 55.4 for the past three months. Readings higher than 50 indicate expansion in the industry, but the drop was worse than economists' anticipated. See more on economic data.
The report gave early hints of a double dip, but the bond market was "trading sideways to slightly lower on the day as stocks find some support," said strategist at CRT Capital Group.
"With little data and no Congress, the currency and equity dance along with deal flow will drive price action," said John Spinello, strategist at Jefferies & Co. "We see a defensive posture toward Treasurys as prudent."
In early trading, the S&P 500 Index (SPX 1,039, +16.12, +1.58%) gained 1.8%.
On Friday, the Labor Department said the private sector of the U.S. economy created fewer jobs than anticipated for June, adding to worries that economic growth may have been slower during the second quarter than forecast. Read Friday's bond report.
Still, analysts note that after a strong rally in recent weeks that took yields on the 2-year to new lows and on the 10-year below the 3% mark, extending price gains in government debt further may require more solid evidence than just fear about a slowdown in economic growth.
With continued headlines about Europe's austere budgets slowing down growth and spending, concerns about state and local-government budgets and a still-weak real estate market, some bond bulls expect Treasurys to remain the place to be over the longer term.
"The 'V' recovery is oh-so-yesterday," said Bill O'Donnell, head of Treasury strategy at RBS Securities. "My immediate concern is that it could take months to prove or disprove the thinking of those that brought us to these rate levels to begin with."
"Meanwhile, the hurdle for higher bond prices will stay elevated now that everyone is cowering in the same foxhole, zealously clutching wads of bills and gold," he wrote in emailed comments.
Still, some bond analysts and investors expect longer-term rates to rise in coming months as investors pull back from bonds because growth turns out to be better than markets currently anticipate it will be. Read about outlook for bond rally.
