Bond yields rise as economic data remain upbeat

Gradually, markets are getting around to the idea that there may not be rate cuts by the Federal Reserve this year. From Bloomberg:

The U.S. stock market posted its first decline in a week after bond yields surged to a nine-month high amid signs the economy may be gaining momentum...

The Institute for Supply Management's index of non- manufacturing businesses rose to 59.7 from 56 in April, the Tempe, Arizona-based group said. Economists surveyed by Bloomberg News had expected a reading of 55.8. Readings above 50 signal growth.

Federal Reserve Chairman Ben S. Bernanke said core inflation remains somewhat elevated, though officials have seen a "gradual ebbing." He also said tighter lending standards for mortgages will "restrain housing demand, although the magnitude of these effects is difficult to quantify." Bernanke spoke via satellite to a conference in Cape Town, South Africa...

Traders who a month ago were convinced the Fed would lower its target for the overnight lending rate between banks at least once by year-end now see almost no chance of that happening, interest-rate futures yields show.

But higher yields in the US are not just the result of lower expectations of a Fed cut; strong growth and higher rates in Europe have contributed too. Again from Bloomberg:

Expansion in European service industries, the biggest part of the economy, gained pace for the first time in four months in May, supporting the case for higher European Central Bank interest rates.

Royal Bank of Scotland Group Plc said today its services index rose to 57.3 from 57 in April. The index is based on a survey of purchasing managers by NTC Economics Ltd. and a reading above 50 indicates expansion. Economists expected an increase to 57.1, the median of 33 estimates in a Bloomberg survey showed.

It has been a similar story in the UK. From Reuters:

British service sector activity grew slightly more than expected in May but companies raised prices at their weakest rate in more than a year, a survey showed on Tuesday.

The Chartered Institute for Purchasing and Supply/NTC index for activity in the services sector...came in at 57.2, well above the 50 divide between expansion and contraction.

Stock markets have done well over the past few months despite relatively weak economic numbers from the US. The more upbeat economic data recently, though, could prove to be bad news for stocks if it means higher interest rates.