(Bloomberg) --Treasury yields declined Wednesday in a holiday-shortened U.S. trading session after weaker-than-anticipated reports on service-sector and labor-market activity.
Yields across the maturity spectrum dropped by at least four basis points. Indications that the U.S. economy is responding to the Federal Reserve's elevated policy rate included a bigger-than-expected drop in the ISM Services Index to the lowest level since 2020, a slowdown in private-sector employment growth and an increase in initial jobless claims.
The five-year note's yield slid as much as 10 basis points to 4.29%, while the 10-year fell to 4.34%, also a weekly low. Swaps traders added slightly to the odds that the Federal Reserve will make at least two quarter-point rate cuts this year in November and December, with the chances of a September move rising to about 70%.
"It remains to be see whether the data is actually decelerating as quickly as the data suggests," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. While expecting the 10-year yield to decline to 4%, "we think the deceleration in activity is likely to take place more gradually than the ISM services data implies."
The drop in yields halted a trend in place since Friday, when former President Donald Trump's chances of unseating President Joe Biden in November got a boost from their first debate. The U.S. 30-year yield reached the highest level in a month on Monday amid predictions that a Trump presidency would lead to higher inflation.
Ahead of U.S. Independence Day on Thursday, a 2 p.m. New York close of trading for bonds was recommended by an industry association. Much activity concluded by 1 p.m., however, when Treasury futures settled and U.S. stock markets closed.
Friday's session includes the Labor Department's June employment report, forecast to show that job creation and wage growth slowed. A gauge of private-sector payrolls released Wednesday by the ADP Research Institute increased less than anticipated, while new claims for unemployment insurance benefits increased more.
"The moderation of the labor market as well inflation data in recent months is good news for the bond markets overall," said Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors. "I think having two cuts priced in for the year is pretty reasonable."
