U.S. government debt yields bounced off their intraday lows as ISM data showed strength in the service sector of U.S. economy, and one Federal Reserve official reiterated that the central bank will assess whether to slow down bond purchases “in coming meetings.”

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.198%

was at 1.202%, remaining near the lowest levels in almost six months, compared with 1.174% at 3 p.m. Eastern on Monday.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.180%

rose to 0.184% versus 0.172% Tuesday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
1.866%

climbed to 1.878% from 1.851% late Tuesday.

What’s driving the market?

Data released on Wednesday showed that a big part of the U.S. economy saw explosive growth in July.

The Institute for Supply Management reported that a survey of service-oriented business activity rose to record 64.1% in July from 60.1% in the prior month. Restaurants, hotels and theme parks like Disney are still doing tons of business after the full reopening of the U.S. economy, and their costs are rising, but they face a new challenge from the delta variant even as they scramble to cope with widespread labor and supply shortages.

Meanwhile, Fed Vice Chairman Richard Clarida said that the economy is likely to continue to grow so that the labor market heals and inflation averages above 2% by the end of 2022, allowing the U.S. central bank to begin raising interest rates in 2023. He also said the Fed would continue to examine tapering of its bond purchases “in coming meetings.”

Yields reversed course from earlier Wednesday, when a report on private-sector jobs for July came in much weaker than expected, setting the stage for the monthly nonfarm-payrolls report on Friday. U.S. private-sector employment increased by 330,000 in July, according to the ADP National Employment report issued Wednesday. The increase was below the 653,000 jobs forecast by economists, according to a Wall Street Journal poll.

Investors had attributed the recent slide in yields, in part, to concerns about the spread of the delta variant of the coronavirus that causes COVID-19 and its possible impact on economic activity. On Tuesday, China renewed mass testing in Wuhan, the city where the disease first emerged, as it deals with outbreaks. Some U.S. cities and regions have re-imposed mask mandates or taken other steps to contain the spread.

Meanwhile, in its refunding announcement Wednesday morning, the Treasury kept the size of its nominal bond and note auctions steady but said it expects an initial set of auction size reductions as soon as the next refunding announcement in November.

What are analysts saying?

“The comments from Clarida helped alleviate some of the concerns raised by the ADP report, which sent yields sharply lower earlier on Wednesday,” said Edward Moya, senior market analyst for the Americas at Oanda Corp. Meanwhile, the ISM report “showed there’s still robust improvement in the economy.”

The disappointing 330,000 gain in the ADP report for July “suggests that labor shortages are still acute,” Paul Ashworth, chief U.S. economist at Capital Economics. “The ADP is not always a good predictor of the official non-farm payroll employment figures but, for what it’s worth, it suggests a clear downside risk to not only the consensus forecast at 880,000, but our own below-consensus 650,000 estimate.”

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