Rates Continue Along Upward Trajectory

Yields rise following strong U.S. economic data. This morning’s robust U.S. services sector data drove the short end of the yield curve to rise 5 bps to intraday highs. Yields then grinded lower into the market close, finishing the day 2-6 bps higher across a steepening curve. The 10-year yield (4.69%) is nearly 40 bps above the 2-year yield (4.29%), with the curve extending its steepest levels since May 2022. Meanwhile, the services sector data also fueled speculation that 2025 rate cuts will be more delayed than originally expected, leading to an equity sell-off; the NASDAQ and S&P 500 fell 1.89% and 1.11% today, respectively.

The U.S. services sector remains robust. The ISM Services Index was 54.1 in December, indicating that services sector growth accelerated from November (52.1). December marked the sixth straight month of expansion, which has led to increased prices. The measure for prices paid rose to 64.4, well above the median forecast of 57.5 and the highest reading in nearly two years. Steve Miller, chair of the ISM Services Business Survey, stated that December’s growth was “boosted primarily by strength in the Business Activity and Supplier Deliveries indexes… many industries noted that end-of-year and seasonal factors were helping drive business activity…”

Debt issuances rise as high yields attract investors. U.S. bond funds had $3.8bn of total inflows during the five-day period that ended on January 2nd following sharp outflows in December, as higher yields prompted a surge in investor bond demand. There’s no dearth of supply, as corporate borrowers take advantage of tight credit spreads and investor appetite. Citigroup analysts estimate high-yield bond issuance of more than $370bn in 2025, 30% higher than 2024. Despite bond fund inflows, government bond yields continue to climb. Today’s 10-year UST auction saw the highest issuance yield since 2007, raising questions about how high UST yields must climb to offset surging supply.