Treasury Yields Spike As Economy Shrugs of Trade Tensions, A Harbinger of Things to Come?

Yesterday’s positive ISM manufacturing report was significant, the index hit a 14 year high (61.3% vs expectations of 57.9%). This comes on the heels of last week’s report that 2nd quarter GDP rose at a 4.2% rate, the best since 3rd quarter 2014. The data indicates that US Companies are expanding unfazed by the constant headlines regarding trade disputes. The trade tensions have been a major factor in “flight to quality” purchases of Treasuries. This has resulted in a downward pressure on yields, keeping them below the levels that are expected for this level of economic expansion in the US (remember Jamie Dimon’s recent remarks that the 10 year yield should be 4% or 5%?). Another factor point to a possible run up in yields this fall: on September 15, a special extension for pension funds to purchase Treasuries and deduct the contribution at last year’s lower rate expires, so a major buyer may slow purchases. With record supply spurring frequent and large auctions of debt and the Fed continuing to pare down its balance sheet of Treasuries, we may see the yield curve return to a more normal form with higher yields at the long end. The 10 year is sitting at 2.90%, watch for the next few key levels of 3.00% and then 3.15%. Will this week’s employment report (Friday) continue this narrative? Stay tuned.