#Bond Report: 10- and 30-year Treasury yields end at lowest levels since February as holiday-shortened week kicks off

How did Treasurys perform?

• The 10-year Treasury note
  TMUBMUSD10Y,
  1.361%
  yield fell 6.5 basis points to 1.369%, the lowest since Feb. 23 based on a 3 p.m. Eastern close, according to Dow Jones Market Data. Prices for debt fall as prices rise.

• The 30-year Treasury bond
  TMUBMUSD30Y,
  1.988%
  dropped 4.7 basis points to 2.003%, the lowest since Feb. 12.

• The 2-year Treasury note
  TMUBMUSD02Y,
  0.219%
  rate declined 1.8 basis points to 0.236%.

Fixed-income drivers

Yields for long-dated U.S. government debt fell to the lowest levels since February, following the path of European bonds. Some analysts are betting that the European Central Bank may remain accommodative despite other policy makers in the world pointing to plans to pull back on easy-money measures.

On Friday, Treasury yields fell even though the U.S. Labor Department said 850,000 jobs were created in June, more than the 706,000 job that were estimated by economists polled by Dow Jones and MarketWatch. The unemployment rate, however, rose to 5.9%, compared with 5.8% last month and an expectation for 5.6%.

On Tuesday, the closely tracked Institute for Supply Management report on the services sector fell to 60.1 in June from 64.0 in May, below MarketWatch forecast for a reading of 63.3. A reading of 50 or greater indicates improving conditions.

Meanwhile. IHS Markit’s final purchasing managers index service-sector reading for June was 64.6 vs. an initial read of 64.8 and down from 70.4 in May.

A struggle to find labor was behind a retreat in services activity, according to the report, with retailers and restaurants unable to easily find enough supplies or to attract enough people to do the work. These shortages are boosting the cost of materials and labor and adding upward pressure on inflation.

Yields were on the decline, even as the service sector reports were putting inflation concerns back in focus.

Crude oil futures initially stoked inflation worries too, with the U.S. benchmark
CL00,
-1.97%
trading at its highest level since November 2014 after talks by the Organization of the Petroleum Exporting Countries and its allies aimed at boosting output broke down over the weekend. But crude subsequently tumbled, pressured on worries producers could open the taps in an effort to capitalize on the crude rally if the OPEC+ standoff persists.

Read: Is this the end of OPEC? What the Saudi vs. U.A.E. standoff means for oil prices

A compression of the differential between the long-term debt yields and their short-dated counterparts, seen as one indicator of economic expectations, was around its narrowest since February.

On Friday, the 2-year Treasury put in its largest weekly decline, down 3.2 basis points, since July 31, 2020, while the 10-year note saw its sharpest weekly decline, off 10.1 basis points, since June 12, 2020, according to Dow Jones Market Data.

What strategists and traders said

“A primary reason Treasury yields are pressuring June lows again is the difficulty in following ‘simple’ economic signals in the transition to the post-pandemic economy in the U.S.,” wrote Jim Vogel, executive v.p. president at FHN Financial, in a note.

“With so many strongly held views on inflation and recovery, stakes are higher for every possible takeaway from the major releases (NFP, CPI, retail sales). Two issues from Friday’s number troubled two bond-bearish views. For those who see long-lasting price pressures across the economy because workers ‘now have the upper hand in getting a larger share of the pie,’ total jobs of 850k were too high,” he wrote.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said: “While I’ve emphasized that we are experiencing the most intense inflation pressures since the 1970’s, I’m only worried about persistent ‘higher’ inflation, not ‘high’ inflation but again, in the context of where global interest rates are, that will be a problem if realized.”

He said that “now that economic growth is being stunted by these pressures, it is a stagflationary environment that the modern day central bank has never experienced.”