TREASURIES-US yields ease from session highs as services activity softens

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 US10YT=TWEB 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 US3YT=RR 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 US30YT=TWEB 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 US2US10=TWEB, 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 US2YT=TWEB 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) US5YTIP=TWEB was last at 2.432% after closing at 2.433% on Monday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.353%, indicating the market sees inflation averaging about 2.4% a year for the next decade.