During Wednesday morning's trading session, the yield on the 2-year Treasury bond, a key indicator closely monitored by policymakers, surged above 5%, driven by fresh economic data indicating continued expansion in the U.S. services sector.
Here are the noteworthy developments:
As per data from Dow Jones Market Data, Tuesday's levels marked the highest for the 10-year and 30-year Treasury rates since August 22, and the highest for the 2-year rate since August 28.
The driving force behind these market dynamics was the release of economic data on Wednesday, which indicated that the U.S. services sector had sustained its expansion for the eighth consecutive month in August. The ISM barometer, which assesses business conditions at service-oriented companies such as restaurants and hotels, climbed to 54.5% in August, surpassing the prior month's reading of 52.7%. Notably, economists surveyed by The Wall Street Journal had initially anticipated a dip in the index to 52.5%.
Later in the day, market participants were eagerly anticipating the release of the Federal Reserve's Beige Book, which offers insights into economic conditions and trends.
Other economic updates released on Wednesday included an increase in the U.S. trade deficit for July, which expanded to $65 billion, as well as the final reading of S&P Global's U.S. services PMI for August, which declined significantly to 50.5 from the July figure of 52.3.
Furthermore, Boston Fed President Susan Collins, in her prepared remarks, suggested that while officials might be nearing the peak for policy interest rates, further tightening could be warranted depending on incoming data.
Market sentiment, as reflected by the CME FedWatch Tool, indicated a 91% probability that the Federal Reserve would leave interest rates unchanged within a range of 5.25% to 5.5% during its upcoming meeting on September 20. Additionally, there was an increased likelihood of a 25-basis-point rate hike, bringing the range to 5.5% to 5.75%, at the subsequent meeting in November, with a probability of 42.9%, up from 25.9% a month prior.
Investors also noted that the government bond market had faced pressure due to an influx of supply from the corporate sector, including $36 billion of high-grade bonds sold on Tuesday alone, part of the $120 billion of corporate issuance scheduled for September, according to Trade Algo.
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