Bullish economic reports this morning have put pressure on bonds, and frankly, given the strength of today’s data we are lucky to have the 10 year note holding at a yield of 3.51%.
The Institute for Supply Management’s non-manufacturing index rose from 57.1 in December to 59.4 in January, its most bullish reading since 2005. Economists had expected only a marginal increase in the service sector report to 57.2. The ISM non-manufacturing report covers a broad mix of the U.S. economy, which includes almost 90% of activity.

In addition to the ISM report, U.S. worker productivity rose 2.6% in the 4th quarter, rising 3.6% for the entire year, while unit labor costs, a measure of inflation, dropped 0.6%. According to Bloomberg, unit labor costs have fallen 1.5% in 2010 marking the second consecutive annual decline, the first time that has occurred since 1962-1963.

Initial jobless claims dropped back to 415,000 from 457,000 for the week ending January 29. The story told by the weekly jobless claims data tells us job losses have slowed, but job creation has not picked up as much as needed. Remember, we will get the January report on net payrolls in the nonfarm payroll report tomorrow morning.

Given the continued unrest in the Egypt and the Middle East, the U.S. markets still show no signs of concern and no flight-to-quality, as evidenced by the sell-off in bonds. As mentioned at the top of this report, the sell-off in the10 year note has pushed the yield to 3.51%.