The 10-year Treasury yield finished above 4% for the first time since November on Thursday, as worries about the strength of the U.S. labor market and stubborn inflation abroad led to continued readjustments in expectations for central bank interest rate rises.
Thursday was also the first time that the yields on maturities from 2- through 30-years all ended the New York session above 4% since Nov. 9, according to Tradeweb.
What happened
- The yield on the 2-year Treasury
TMUBMUSD02Y,
4.134%
advanced 1.5 basis points to to 4.902% from 4.887% on Wednesday. Thursday’s level is the highest since July 17, 2007, based on 3 p.m. figures from Dow Jones Market Data. - The yield on the 10-year Treasury
TMUBMUSD10Y,
3.546%
jumped 7.8 basis points to 4.072% from 3.994% as of Wednesday afternoon. Thursday’s level is the highest since Nov. 9. - The yield on the 30-year Treasury
TMUBMUSD30Y,
3.675%
climbed 6.7 basis points to 4.019% from 3.952% late Wednesday. Thursday’s level is the highest since Nov. 14.
What drove markets
Concerns that inflation will stay stubbornly high for longer than expected pushed Treasury yields toward fresh milestones.
Data from the eurozone showed an annual CPI inflation rate of 8.5% in February, only slightly lower than January’s reading of 8.6% and above the 8.2% consensus forecast. German 10-year bund yields
TMBMKDE-10Y,
2.244%
rose 3.7 basis points to 2.750%, the highest since 2011.
Meanwhile, in U.S. economic updates, weekly initial jobless claims fell again at the end of February, staying below 200,000 for the seventh week in a row and suggesting the strength of the labor market may remain a concern for the Federal Reserve. In addition, U.S. productivity was worse than initially forecast for the fourth quarter.
On Thursday, Atlanta Fed President Raphael Bostic said he is firmly in the camp that supports quarter-of-a-percentage-point interest rate hikes, though there is a case that could be made that the Fed will have to go higher than 5%-5.25% with its policy rate. Bostic also reportedly said the central bank could be in a position to pause its rate hikes sometime this summer, which took the edge of the rise in yields, boosted stocks, and prompted traders to pull back on higher-for-longer rate expectations as the day went on.
Markets are now pricing in a 73.8% probability that the Fed will raise its benchmark interest rate by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. The chances of a 50-basis-point hike this month were seen at 26.2%.
The central bank is mostly expected to take its fed funds rate target to at least 5.25%-5.5% by November, according to 30-day Fed funds futures. That’s up since the start of the year, when traders were betting that this so-called ‘terminal rate’ would be below 5%.
What analysts are saying
The direction of yields ultimately “depends on the trajectory of inflation,” said Thierry Wizman, Macquarie’s global FX and rates strategist in New York. “And we are not going to see new U.S. inflation data until the February CPI [on March 14].”
“My expectation is that we are not too far from the peak in U.S. yields, and I do believe inflation will pursue a downward path for the next few months,” Wizman said via phone.
“The U.S. has been hiking for a year and monetary policy affects the economy with long and variable lags,” he said. “We are already seeing signs that the U.S. economy will be slowing and my expectation is that we will see disinflationary trends continue over the next few months. Europe has different issues, with the European Central Bank having started to tighten later, and has been affected greatly by rising inflation expectations because of an energy crisis over winter. Labor in Europe has also been much more aggressive than in the U.S. about demanding wage increases.”
