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Treasury yields struggle for direction despite solid ISM services data

Treasury yields held their ground Tuesday as a gauge of the service sector’s health suggested the U.S. economy’s momentum has remained robust.

The 10-year Treasury note yield TMUBMUSD10Y, -0.13% was virtually unchanged at 2.722%, while the two-year note yield TMUBMUSD02Y, +0.32%   was up 0.6 basis points to 2.551%. The 30-year bond yield TMUBMUSD30Y, -0.03% was nearly flat at 3.088%. Bond prices move inversely to yields.

The bond market’s muted action comes in the wake of data highlighting strength in the U.S. services industry, considered a more significant driver of the U.S. economic engine than manufacturing. The Institute of Supply Management said its nonmanufacturing index for February rose to 59.7% from 56.7% in January. Economists polled by MarketWatch had expected a reading of 57.5. A reading of at least 50 reflects improving conditions.

“This report is another strong signal that the economy is bouncing back quickly and vigorously after the government shutdown,” wrote Stephen Stanley, chief economist for Amherst Pierpont Securities.

But investors said the overall downtrend for U.S. data means a single positive data release won’t offset broader concerns that the U.S. expansion is entering its late stages. Such fears have capped the rise of the 10-year benchmark bond yield, noted Jon Hill, a rates strategist at BMO Capital Markets.

Fresh developments also emerged from the world’s second-largest economy: China. On the first day of China’s annual legislative session, Beijing confirmed it would aim for its economy to grow between 6% and 6.5% in 2019, as opposed to the 6.5% it targeted last year. It also pledged to roll out a larger tax cut as the government looks to unfurl increased fiscal stimulus to spur expansion, even as it looks to stabilize the risks around excessive debt levels.

Investors faced a raft of fresh remarks from senior Federal Reserve officials. Minneapolis Fed President Neel Kashkari said muted wage growth pointed to lingering slack in the labor market, echoing Boston Fed President Eric Rosengren’s comments that tepid inflation was one reason the central bank has paused rate increases.

Meanwhile, Dallas Fed President Robert Kaplan said mounting debt throughout the U.S. economy had left it more vulnerable to higher interest rates than historically. Fed Chairman Jerome Powell will speak Friday on the normalization of monetary policy.