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The 10-year treasury rate bounced off of its 2023 low of 3.19% in April, but by October 23 it reached 5% on an intra day high. However, by November 14, the 10-year interest rate fell by over 50 basis points.

First came a surprise from the Institute for Supply Management (ISM) indices as both services and manufacturing fell. Then mid-November CPI rates released by the Bureau of Labor Statistics came in lower than expected.

On December 1, will the treasury market be surprised again by ISM Service and Manufacturing?

ISM indexes are developed to indicate a reading above 50 is considered expansionary whereas below 50 are considered contractionary. While ISM services fell nearly two big figures from 53.6 to 51.8, it remained above 50. However, ISM manufacturing has been below 50 for a year and the October reading (released on November 1) moved it lower again.  Notably all constituents, except a small positive contribution from production, moved into negative territory once again.  Both the combination of the move in services and the continued weakness in manufacturing saw treasury rates fall.

In addition to lower rates, an important feature is how the curve has responded. 

The often watched 10-year treasury rate minus the 2-year treasury rate (2/10s) had made an effort to move into positive territory as can be seen in Exhibit 4. This level was much higher than the negative 110 seen in mid-summer. After the surprising ISM report, the curve began flattening aggressively into mid-November and steepened slightly after a lower than expected CPI report. The curve steepened as the market removed Fed hikes and priced more cuts as seen by the CME Group FedWatch Tool.

Treasury butterflies also performed during this time period. A butterfly is a position of short one unit of 5-year notes and 30-year bonds and long two units of 10-year notes as an example, but can be a variety of other treasury maturities and is a proxy for the shape of the treasury curve. 

The 5/10/30s butterfly also moved aggressively lower. This movement showed that the market priced a lower 10-year point on the curve relative to the other points even as the market was moving lower in unison.

Fortunately, traders can manage treasury rates using the BrokerTec platform. Both outright trading and curve trading are available to address ISM and other economic and macro events as they come.  

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