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ISM nonmanufacturing PMI slips to 50.1, below expectations

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Fed rate cut expectations rise sharply after weak payrolls

report

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Treasury to auction $125 billion in notes and bonds this

week

By Chuck Mikolajczak

NEW YORK, Aug 5 (Reuters) - U.S. Treasury yields were

higher on Tuesday following three straight days of declines, but

were off earlier highs after data showed stalling activity in

the services sector.

The Institute for Supply Management (ISM) said its

nonmanufacturing purchasing managers index (PMI) slipped to 50.1

last month, below the 51.5 estimate of economists polled by

Reuters, and from 50.8 in June.

In addition, price pressures appeared to increase, as the

survey's prices paid index rose to 69.9, the highest level since

October 2022, from 67.5 in June.

"I really believe the Fed is probably going to lean towards

easing at some point by the end of the year, but right now, a

number like this, it certainly puts a lot of strength behind

what Powell has been saying as far as we're waiting to see what

these tariffs do to inflation," said Tom di Galoma, managing

director at Mischler Financial Group in Stamford, Connecticut.

Yields have fallen in recent days, with the 10-year yield

down for three straight sessions, including a sharp drop on

Friday following a weak government payrolls report and a

surprise announcement from the Federal Reserve that Governor

Adriana Kugler was resigning early.

The yield on the benchmark U.S. 10-year Treasury note

was up 0.4 basis point to 4.202% after rising as

high as 4.226% on the session.

The 10-year yield had dropped 18 basis points over the prior

three sessions, its biggest 3-day decline since mid-April.

More supply will hit the market this week as Treasury is

scheduled to auction $58 billion in 3-year notes

later on Tuesday, $42 billion in 10-year notes on Wednesday and

$25 billion in 30-year bonds on Thursday.

"We get a lot of supply this week, in three-year, 10-year,

and 30-year, so the market's sold off a bit overnight on that

and we'll see how the demand is this week," di Galoma said.

The yield on the 30-year bond fell 0.9 basis

point to 4.786% after climbing to 4.815% on the day.

Expectations for a rate cut of at least 25 basis points by the

Federal Reserve at its September meeting have sharply increased

in recent days, and currently stand at 88.2%, according to CME's

FedWatch Tool, up from 63.3% a week ago and below 50% before

Friday's jobs report was released.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a positive 49.0 basis points after reaching

a 2-1/2 week high of 54.9 on Monday.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations, rose

2.7 basis points to 3.708%. The yield had dropped nearly 26

basis points over the past three sessions, its biggest drop in a

year.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.432% after closing at 2.433% on Monday.

The 10-year TIPS breakeven rate was last at

2.353%, indicating the market sees inflation averaging about

2.4% a year for the next decade.