U.S. Treasury yields moved higher across the board Thursday, with the 10-year breaking through 1.4% and the 2-year slightly higher after registering its biggest one-day jump in three months following Wednesday’s Federal Reserve policy update.
Rising U.S. stock indexes in the past two days, on top of a flattening Treasury yield curve on Wednesday, suggest that some investors remain skeptical that the central bank will be able to deliver as many rate hikes as it thinks it can in coming years.
Meanwhile, investors continued to watch developments with China’s Evergrande Group, with reports suggesting that the Chinese government would only come to bailout the heavily leveraged property developer at the last minute as its debts come due.
What Treasury yields are doing
The 10-year Treasury note yields
1.4%, compared with 1.332% on Wednesday at 3 p.m. Eastern Time.
The 30-year Treasury bond rate
was at 1.915%, versus 1.848%, up 1.2 basis points.
The 2-year Treasury note
was yielding 0.243%, compared with 0.240% on Wednesday, when it had the largest one-day climb since June 23.
What’s driving the market?
Yields were higher across the curve on Thursday, with the widely watched spreads between two and ten year yields and five and 30 year yields stabilizing. The spreads had flattened on Wednesday, following the Fed’s policy update, on traders’ expectation that the central bank won’t get as many rate hikes done as it thinks it can. The flattening occurred even though policy makers had penciled in a sooner-than-expected rate increase for 2022, and said a tapering of monthly bond purchases “may soon be warranted.”
The Federal Reserve has set the stage for an announcement of tapering at the next central bank meeting in November, which could see reductions of the monthly purchases of $80 billion in Treasurys and $40 billion in mortgage-backed securities kick off by December, especially if the labor market maintains its trajectory of improvement from the COVID-19 pandemic.
Some analysts attributed Wednesday’s bond market reaction to a dovish interpretation of the Fed’s decision, considering fewer-than-expected policy makers called for a first policy interest rate increase next year from the current 0% to 0.25% range. Others noted that even with tapering of bond purchases the Fed is still buying sizable amounts of assets, with its balance sheet at around $8.5 trillion, as of Sept. 13. An update on the central bank’s balance sheet is due at 4:30 p.m. Thursday.
Meanwhile, the Bank of England kept its monetary policy unchanged, but downgraded projections for third-quarter economic growth. The BOE unanimously decided to keep interest rates at 0.1%, and its two newest members were on the side of maintaining its bond purchase program in a 7-2 vote. That news came as the Central Bank of the Republic of Turkey made a surprise decision to cut interest rates, lowering them to 18% from 19%.
In data releases, U.S. weekly jobless benefit claims jumped to a one-month high in what largely appears to be a case of California catching up on a large backlog of claims. Initial claims for jobless benefits rose by 16,000 to 351,000 in the week ended Sept. 18, the government said Thursday. Economists polled by The Wall Street Journal had estimated new claims would total 320,000.
The IHS Markit reading of the U.S. services sector hit a 14-month low, and the manufacturing measure dropped to a 5-month low, as private sector firms in the U.S. signaled a slowing pace of expansion.
Meanwhile, an auction of $14 billion 10-year Treasury inflation-protected securities came in as “another solid offering,” said strategist Ben Jeffery of BMO Capital Markets.
Progress in Congress toward raising the U.S. federal debt limit is also being monitored by fixed-income investors. On Wednesday, six former U.S. Treasury secretaries from Democratic and Republican administrations warned that failing to raise the debt limit on time and allowing the U.S. to default could cause serious harm to the economy and national security.
What analysts are saying
- “TIPS are a great [U.S. Treasury] allocation when the Fed is debating what to do about inflation, but less so when the Fed signals initial steps toward a policy turn tighter–even if tightening is 12 months away,” wrote Jim Vogel executive v.p. at FHN Financial.
- “Even with a taper, we are looking at more buying of $600-700 billion. Think about that in historical context of Fed QE,” writes Gregory Faranello, executive director of AmeriVet Securities and head of U.S. rates trading and strategy.
- “If 10yr yields close above 1.42%, look for a move towards 1.52%,” said managing director Tom di Galoma of Seaport Global Holdings.
- Following what appear to be “somewhat hawkish outcomes” from the Fed’s meeting, “equities haven’t taken much notice–yet,” said Jeffrey Cleveland, chief economist at Payden & Rygel. “At some point though, sharply higher interest rates driven by tighter monetary policy expectations will bite.”