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Yields Flirt with Support Levels, Despite Solid Data

David Becker
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US treasury yields are poised to test the 1-year lows near 2.5%, despite stronger than expected ISM services data and a robust non-farm payroll report this past Friday. Bond traders are leery of the data and continue to push yields lower. Additionally, short positions in bonds were at record highs prior to the release of the government’s payroll report, which generated a mild short squeeze.

The US 10-year yield has declined to 2.61%, and 2-basis points above the 2.59% print seen on Friday. This was the lowest yield print of 2014, and came despite a better than expected payroll report in which the US created 288K jobs during April compared to the 220K expected by economists. When traders looked deeper into the numbers, many were unhappy with the decline in the jobs participation rate, which showed that nearly 800K job seekers dropped out of the survey. The participation rate is now the lowest it’s been since 1978, which is a disturbing figure.

On Monday, The Institute for Supply Management reported its services sector index rose to 55.2 in April from 53.1 in March, topping expectations for a read of 54.1. The data provides further evidence that economic activity is regaining momentum after lagging through much of the winter .The April reading marked the 52nd straight month the index was above 50, the level that separates expansion from contraction. Still despite the stronger than expected number, yields failed to move higher, as traders continue to keep a lid on long term interest rates.

True, the Fed wants rates to remain low, as lower yields reduce the value of the dollar and have a knock on effect by increasing inflation, which is also a goal of the Fed. A yield close below 2.60, could lead to a test of the 200-day moving average near 2.40%.

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