It's not as if the bond market magically knew that today's non-manufacturing PMIs would come in hotter than expected, but they were clearly trading defensively to begin the holiday-shortened week.  That defensiveness is proving warranted after the ISM Services PMI jumped to 54.5 vs 52.5 forecasts and a previous reading of 52.7.  A noticeable uptick in the "prices paid" component surely doesn't help the case for service sector inflation. Thus the day begins with additional weakness--especially in the shorter end of the yield curve as traders price in a higher Fed rate trajectory over the longer term.

In other words, the battle over the Fed outlook is taking place most noticeably in the more distant meeting months.  Fed Funds Futures for December barely budged on the ISM data, but June's meeting popped about 5bps instantly.

Further to the point of the market's reaction being focused on Fed implications, stocks and bonds did their quintessential mirror image trade (the one we always see when the entire market is reacting to changes in the Fed outlook).