Bond Report: 10-year Treasury yield slips below 3.9% as traders weigh ‘higher for longer’ rate path


Bond yields finished the New York session lower on Thursday as traders and analysts continued to assess whether “higher for longer” interest-rate expectations have gone a bit too far.

What happened
  • The yield on the 2-year Treasury note TMUBMUSD02Y, 4.703% slipped less than 1 basis point to 4.691% from 4.697% on Wednesday. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury note TMUBMUSD10Y, 3.886% declined 4.3 basis points to 3.879% from 3.922% as of Wednesday afternoon.
  • The yield on the 30-year Treasury bond TMUBMUSD30Y, 3.888% slipped 5 basis points to 3.877% from 3.927% as of late Wednesday. Thursday’s level is the lowest for the 30-year rate since Feb. 15, based on 3 p.m. figures from Dow Jones Market Data.
  • The 10- and 30-year rates are each down three of the past four trading sessions.
What drove markets

Treasury yields were mostly lower on Thursday after Wednesday’s release of the minutes from the Fed’s Jan. 31-Feb. 1 rate-setting meeting gave little indication the central bank would veer from its tighter-policy trajectory.

Expectations for higher peak interest rates have already gained traction around much of the world, ever since January’s blowout U.S. jobs report. A recent firmer trend in yields was underpinned earlier on Thursday, by news that eurozone inflation remains stubbornly high at 8.6% for January — which briefly pushed up the 10-year benchmark German bund yield TMBMKDE-10Y, 2.480% to as high as 2.556% before it settling at 2.481%.

U.S. data released on Thursday showed that initial jobless claims stayed firmly below 200,000 for a sixth straight week, and the economy grew at a 2.7% revised annual pace at the end of 2022 or a touch slower than initially thought.

Markets are pricing in a 73% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. Meanwhile, the chance of a 50-basis-point hike is 27%, up from 1.3% a month ago.

The central bank is still mostly expected to take its fed-funds rate target to at least between 5.25% and 5.5% by June, according to 30-day fed funds futures. About a month ago, the “terminal” rate was seen at around 4.9%.

Read: The bond market’s worst-case scenario isn’t a Fed rate of 6%. It’s this.

What analysts are saying

“Investors have ramped up their expectations for the near-term path of the fed-funds rate amid talk of `higher for longer.’ But long-run expectations for the policy rate have already climbed significantly. If anything, we think this move may be overdone,” said James Reilly, assistant economist at Capital Economics.

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