Bond Report: Treasury yields dip after jobless claims jump to nearly two-year high


U.S. Treasury yields edged lower Thursday morning after new jobless claims showed the number of people who applied for unemployment benefits in early June jumped to a nearly two-year high, while investors reassessed Federal Reserve policy trajectory following unexpected interest-rate rises by central banks in Australia and Canada.

What’s happening

  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.512% shed 4 basis points at 4.504% versus 4.548% at 3 p.m. Eastern Wednesday.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.719% dropped 5 basis points to 3.734% from 3.782% Wednesday.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.891% declined by 3 basis points to 3.908% compared with 3.941% Wednesday afternoon.

What’s driving markets

Two-year Treasury yields were lower on Thursday morning after hovering near their highest in three months amid renewed concerns that the Federal Reserve may keep interest rates higher for longer.

The shift up in short-term yields follows a surprise increase in borrowing costs on Wednesday by the Bank of Canada as it continues to battle stubbornly high inflation.

See: Why U.S. stock-market investors were rattled by the Bank of Canada’s surprise rate hike

The BoC move has reminded investors that even if the Fed pauses its tightening cycle after its policy meeting next week, it may still need to resume raising interest rates should inflation not decline quick enough from the current 4.9% to its 2% target.

The U.S. consumer price index inflation report for May is due out next Tuesday morning.

Markets are pricing in a 72.5% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.

However, the chance of an additional 25-basis-point rate increase in July has risen to nearly 50%, up from just 10% a month ago. And whereas a few months ago the Fed was expected to have begun cutting rates from current levels by this fall, the market is now pricing in no such reduction until next year.

In U.S. economic data, the number of people who applied for unemployment benefits in early June jumped to a nearly two-year high of 261,000. New jobless claims in the seven days ended June 3 climbed by 28,000 from the prior week, the Labor Department said Thursday.

Wholesale inventories in the U.S. fell 0.1% in April. Sales in the month were up 0.2%, the government said Thursday. The inventory-to-sales ratio slipped to 1.40 months from 1.41. A year ago the ratio stood at a much lower 1.27. The ratio reflects how long it would take a company to sell all the goods sitting on warehouse shelves.

At 11:30 a.m. ET the US Treasury will sell $60 billion 4-week and $50 billion 8-week bills as it begins to refill its coffers after Congress lifted the federal debt ceiling last week.

What are analysts saying

“With less than a week to go until the Fed’s next decision, [Wednesday] offered another hawkish surprise for markets after the Bank of Canada delivered an unexpected 25bp rate hike. Now that might be just one central bank, but it comes on the back of a similar surprise hike from the Reserve Bank of Australia the previous day, so investors are starting to see a pattern emerging here and there was a significant bond selloff as a result,” said Henry Allen, strategist at Deutsche Bank.

“The latest developments have also run against the prevailing narrative that central banks are on the verge of pausing their rate hikes, particularly given Canada was one of the first to formally signal a pause back in January. The big question now is whether the Fed might follow up with a hike of their own next Wednesday, or whether they’ll finally keep rates on hold after 10 consecutive increases,” Allen added.

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