NEW YORK — U.S. Treasury yields surged in
a volatile trading session on Thursday as investors anticipated
strong job reports that could spur further aggressive monetary
tightening by the U.S. Federal Reserve as it seeks to fight
U.S. government bond yields – which move inversely to prices
– have been climbing after comments by Federal Reserve Chair
Jerome Powell last week that indicated the central bank will
keep raising interest rates to fight inflation even as that
causes pain for households and businesses.
On Thursday, benchmark U.S. Treasury 10-year yields
rose by over 13 basis points to an over two-month
high of 3.26% ahead of the release of a Labor Department report
showing that U.S. weekly jobless claims declined further,
confirming tight labor conditions.
Two-year note yields jumped to a new 15-year high
of 3.511% and five-year yields increased by over 12
basis points to 3.407%.
The moves come ahead of the release of the key report on
nonfarm payrolls data, due on Friday, which is likely to further
cement expectations the Fed will continue with outsized rate
hikes after three straight increases of 75 basis points.
“I think consensus is that all the jobs numbers this week
are going to be pretty strong, and people are probably
front-running that a bit,” said Thomas Hayes, chairman and
managing member of New York-based Great Hill Capital.
Hayes said he expects Treasury yields to keep climbing in
the coming days until the Consumer Price Index (CPI) inflation
report, due Sept. 13. “I think the bears are in control
short-term, but will have an unpleasant surprise mid-month when
they realize inflation is really starting to come under
control,” he said.
Fed funds futures’ traders were pricing in a 75% chance of
the Fed hiking interest rates by 75 basis points at its next
policy-making meeting on Sept. 20-21. They expect interest rates
to keep climbing to a high of over 3.95% in March, with some
rate cuts priced in for later next year.
Just a few weeks ago, the expectation was for the Fed to
start cutting rates as soon as March 2023 to boost a dwindling
economy bruised by the current rate-hiking cycle.
“I think the anticipation around more hawkishness is coming
from the various Fed speakers over the past week,” said Ryan
O’Malley, fixed income portfolio manager at Sage Advisory.
“They’ve been very clear that they don’t intend to ‘pivot’
anytime soon, and were dismayed by the market pricing in an
anticipation of such a pivot from mid-June through the end of
July,” he said.
Real U.S. yields, as represented by Treasury
Inflation-Protected Securities, or TIPS, have also been climbing
in recent weeks. On Thursday, yields on 10-year TIPS
jumped to 0.805%, the highest since mid-June.
Five-year TIPS yields reached 0.867%, the highest
since January 2019.
The breakeven rate on five-year TIPS was last
at 2.661%, down from over 2.9% last week. The five years forward
inflation-linked swap, seen by some as a better
gauge of inflation expectations, has also declined, to 2.559%
from over 2.6% earlier this week.
The closely watched part of the U.S. Treasury curve
measuring the spread between yields on two- and 10-year notes
stayed inverted but narrowed to minus 25.7 basis
points, the steepest it has been in a week.
An inversion of this yield curve is typically a precursor to
recession, predicting eight of the last nine U.S. downturns.
September 1 Thursday 3:00PM New York / 1900 GMT
Price Current Net
Yield % Change
Three-month bills 2.8875 2.9489 0.018
Six-month bills 3.2725 3.3735 0.024
Two-year note 99-124/256 3.5199 0.070
Three-year note 98-210/256 3.5491 0.088
Five-year note 98-182/256 3.4078 0.122
Seven-year note 98-120/256 3.3726 0.130
10-year note 95-168/256 3.2646 0.133
20-year bond 96-32/256 3.65 0.129
30-year bond 92-252/256 3.3739 0.119
DOLLAR SWAP SPREADS
Last (bps) Net
U.S. 2-year dollar swap 35.25 -0.25
U.S. 3-year dollar swap 13.75 -0.75
U.S. 5-year dollar swap 6.75 -1.00
U.S. 10-year dollar swap 8.75 0.00
U.S. 30-year dollar swap -29.25 -1.25
(Reporting by Davide Barbuscia; Editing by Emelia
Sithole-Matarise and Jonathan Oatis)