Market Extra: Treasury yields rise as investors look beyond economic wreckage to assess reopening progress

Market Extra

U.S. ISM services gauge seen falling to 40%

U.S. Treasury yields rose on Tuesday as stocks gained ground on hopes that the U.S. economy had handled the worst of the COVID-19 crisis as states and counties start to reopen businesses.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
0.672%

rose 2.2 basis points to 0.659%, while the 2-year note rate
TMUBMUSD02Y,
0.184%

was virtually unchanged at 0.186%. The 30-year bond yield
TMUBMUSD30Y,
1.331%

slipped 2.9 basis points to 1.326%.

What’s driving Treasurys?

Traders looked past the economic wreckage wrought by the coronavirus pandemic as the U.S. begins to lift the business lockdowns put in place to stem the spread of the disease. The buoyant sentiment in equities sapped demand for government paper, with U.S. equity futures indicating a higher start for Wall Street on Tuesday.

Investors will also take a look at the Institute for Supply Management’s service purchasing managers index for March, offering one of the first snapshots of the hit to the sector, the mainstay of the U.S. economy. Economists polled by MarketWatch anticipate the services gauge to fall to 40% in April. Any number below 50% represents a contraction in industrial activity.

In other data, the U.S. international trade deficit widened slightly to $44.4 billion in March, down from $39.8 billion in February.

Chicago Federal Reserve President Charles Evans, St. Louis Fed President James Bullard and Atlanta Fed President Raphael Bostic will give remarks throughout the day, following last week’s meeting of the Federal Open Market Committee, its rate-setting group.

Last week the Fed Chairman Jerome Powell said the U.S. central bank would do everything in its power to support the economy, but added that further help from the federal government and Congress needed to be forthcoming.

A German court ruled Tuesday that the German government and parliament should have challenged the ECB’s 2015 quantitative-easing programme and were now obliged to take “active steps” against it. The Bundesbank may not take part in QE, the ruling says, unless the ECB can prove within three months that its programme is “not disproportionate”. The ruling raises troubling questions about the future of the recent ECB bond-buying programme, implemented to combat the fallout from the coronavirus pandemic.

See: ‘This is the most important question’ for macro investors, and the answer could point to negative bond yields in U.S., says analyst

What did market participants’ say?

“Economic contraction might be reaching its worst – or did in late April – but the pandemic promises a much longer slog than it did 6 weeks ago when lockdowns felt like the biggest hurdle to overcome. Lockdowns did carry a large cost, but Covid-19 appears fierce enough to find new ways to inflict pain on employees and companies,” said Jim Vogel, an interest-rate strategist at FHN Financial.

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