Bond Report: Treasury yields drop despite easing tensions in Europe’s banking sector


U.S. bonds resumed their rally, pushing 2- through 30-year yields lower once again, Thursday morning even after efforts to help Switzerland’s Credit Suisse eased tensions in Europe’s banking sector.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 3.894% slipped to 3.953% from 3.973% on Wednesday.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.379% dropped to 3.43% from 3.492% as of Wednesday.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.596% slipped to 3.622% from 3.687% late Wednesday.
What’s driving markets

On Thursday, the ECB followed through with its plan to raise interest rates by a half-percentage point, given inflation that’s projected to remain high. As with the Federal Reserve, investors fear the ECB’s ability to tackle inflation by lifting rates has been compromised by fragility in the banking sector.

The bond-market rallied in part on the view “that the ECB is risking a policy error by hiking at a time of such uncertainty in the financial sector,” said BMO Capital Markets strategist Ian Lyngen.

Prior to the ECB’s decision, a calmer mood in markets prevailed after the Swiss central bank moved to support beleaguered bank Credit Suisse CSGN, +12.79%.

Uncertainty about the Fed’s most likely policy trajectory has caused sharp moves up and down in bond yields in the past week or so. Meanwhile, markets are pricing in a 71.6% probability that the Fed will raise interest rates by another 25 basis points — to a range of 4.75% to 5.0% — next Wednesday, according to the CME FedWatch tool. The central bank is mostly expected to cut its policy rate by the end of the year, according to fed funds futures.

U.S. economic updates released on Thursday showed jobless claims tumbled to 192,000 last week and returned close to historic lows, suggesting that layoffs in the U.S. remain quite low. Meanwhile, housing starts rose by 9.8% in February to 1.45 million and the Philadelphia Fed manufacturing gauge remained deep in contraction territory this month.

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