Daily Market Color February 5, 2025Tariff Concerns Moderate Yields continue to decline in a bull flattening session. Rates fell 1-11 bps today, extending the decline over the past few weeks that has pushed Treasury yields to their lowest levels since mid-December. Term yields are now ~40 bps lower than their year-plus long highs set in early January, with the 10-year yield now at 4.42%. The short end has declined ~25 bps over that same timespan, with the 2-year yield at 4.19%. The curve flattening reflects a shift in market sentiment toward lower-than-expected inflationary pressures stemming from Trump’s policies, while slowed services sector growth contributed as well. Treasury Secretary Bessent comments on tariffs, rate outlook. Newly appointed Treasury Secretary Scott Bessent alluded to the success of tariffs as negotiating tools today, pointing out the immediate response from Colombia, Mexico, and Canada to appease President Trump after the White House announced levies. Calculated use of tariff threats as negotiating tools could lead to reduced inflationary pressures, while Bessent added that his and President Trump’s goal is to see a corresponding reduction in longer-term yields. He specified that energy supply increases are crucial, saying, “the energy component for them is one of the surest indicators for long-term inflation expectations.” Services sector growth slows in January. Per ISM services index data released today, the U.S. service sector failed to meet growth expectations, and expansion declined from last month. The overall index landed at 52.8 vs. the 54.0 expected result and fell from December’s 54.0 print. The index began a series of consecutive monthly increases last June, peaking at 55.8 in October. Strong services powered U.S. growth and offset a laggard manufacturing sector, though the services sector has fluctuated over the past couple months. While January’s result could make further service sector cooling more likely, the release noted that seasonal factors such as poor weather conditions during the winter months played a large part in the decline.
