Bond yields rose early Thursday as traders awaited fresh comment from Fed Chair Jerome Powell, a jobs market update and another U.S. government bond auction.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
added 1.7 basis points to 4.945%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 2.4 basis points to 4.530%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
climbed 4.6 basis points to 4.663%.
What’s driving markets
Benchmark bond yields were higher, but sat just above six-week lows having fallen sharply of late on signs a cooling jobs market meant the Federal Reserve was finished hiking interest rates, and amid evidence investors can readily absorb the government’s sales of paper.
Three events on Thursday may test that narrative. First, the weekly initial jobless claims report will be released at 8:30 a.m. Eastern, with bond bulls hoping that the forecast increase to 220,000 from last time’s 217,000 indicates a less robust labor market that will help suppress wage inflation.
Then at 1 p.m. the Treasury will auction $24 billion of 30-year bonds. Here investors will be hoping the sale is as well-received by the market as the previous day’s $40 billion 10-year sale.
Finally, Fed Chair Jerome Powell is expected to make comments at an International Monetary Fund panel on global monetary policy challenges, due at 2 p.m. The main question for the market: Will he push back against the recent easing of monetary conditions?
“U.S. bond traders are getting ahead of themselves, and it’s about to become a serious problem for the Federal Reserve’s ‘last mile’ efforts – as the Fed officials should think carefully how to contain a too early and too high optimism from the bond markets – which will unwantedly loosen the financial conditions in the U.S. before the Fed reaches its 2% inflation goal,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
However, Powell’s colleague at the Chicago Fed, Austan Gollsbee, expressed concern that the central bank must be careful not to let longer-term yields overshoot. Goolsbee said in an interview with the Wall Street Journal that long rates, more than short rates, can have a “very substantial effect” on the economy.
Ahead of Thursday’s potential catalysts, markets are pricing in a 91 probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting at the end of January is priced at 18%. The central bank is not expected to take its Fed funds rate target back down to around 5% until July 2024, according to 30-day Fed Funds futures.
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