Treasury yields moved higher Thursday as U.S. weekly jobless benefit claims fell to a pandemic low of 290,000 and traders began factoring in a higher annual pace of consumer-price gains for the rest of the year, just ahead of the Federal Reserve’s blackout period next week.
The rise in yields included the 5-year rate
which rose above 1.2% and reflects expectations for a forthcoming cycle of rate hikes from the Fed that may start next year. The two-year yield hit another 52-week high, while the 10-year rate climbed to a level not seen since May.
What are yields doing?
The 10-year Treasury note
yield rose 3.9 basis points to 1.674%, up from 1.635% at 3 p.m. Eastern Time on Wednesday. It’s the highest level for the rate since May, based on 3 p.m. levels, according to Dow Jones Market Data. The rate has climbed for five straight trading days. Yields and debt prices move in opposite directions.
The 2-year Treasury note
yield rose 6.1 basis points to 0.434%, a fresh 52-week high and up from 0.373% a day ago. It’s the highest yield since March 18, 2020.
The 30-year Treasury bond rate
rose 1.6 basis points to 2.127%, compared with 2.111% Wednesday afternoon. It’s the highest level since Oct. 8.
What’s driving the market?
Treasury yields drifted higher as traders began to factor in the potential for Fed rate hikes starting as soon as 2022, along with persistently higher inflation.
Meanwhile, weekly jobless claims showed companies shying away from layoffs amid the biggest labor shortage in decades. A reading of initial jobless claims for the week ended Oct. 16 dropped by 6,000 to 290,000 in the seven days ended Oct. 16. That’s below the 300,000 estimated new claims that had been expected from economists polled by The Wall Street Journal.
The Philadelphia Fed’s manufacturing index fell to 23.8 in October from 30.7 in the prior month, but remained in solid growth territory. Existing home sales improved in September, rising 7% on a monthly basis and reaching a seasonally-adjusted annual rate of 6.29 million. And the U.S. leading economic index grew a softer 0.2% in September and pointed toward somewhat slower growth, the Conference Board said Thursday.
A $19 billion auction of five-year Treasury inflation-protected securities, or TIPS, produced strong demand on Thursday — the latest sign of how much investors are thirsting for inflation protection.
So-called fixings, which trade as derivatives, now imply a headline year-over-year CPI print of 5.9% in October, and 6.4% in both November and December, said Tim Magnusson, partner and senior portfolio manager at Garda Capital Partners LP in Minneapolis. The October reading alone would be the highest level in more than 30 years.
Read: Traders are pricing in annual pace of U.S. consumer price gains at around 6% or higher for the next three months
Many investors are already looking past the anticipated start of the Fed’s tapering of monthly bond purchases, which is expected to be announced at its policy meeting on Nov. 2-3. In recent speeches, policy makers have expressed concern that inflation may mean higher interest rates are needed in 2022.
On Wednesday, Fed Gov. Randal Quarles, speaking at the Milken Institute Global Conference, said he sees “significant upside risks” to forecasts that inflation will decline sharply next year. However, Cleveland Fed President Loretta Mester, in an interview with CNBC, has suggested rate hikes aren’t in the offing.
New York Fed President John Williams is scheduled to moderate a discussion at the 3rd Bund Summit organized by China Finance 40 Forum at 9 p.m. ET.
What analysts are saying
“The market is trying to figure out where we shake out on inflation,” said Rob Daly, director of fixed-income at Glenmede Investment Management in Philadelphia. “There are a lot more questions than answers on what inflation is going to do for the rest of the year into 2022, and how it can affect risk assets. I think we can have more durable inflation, but I’m not sure it’s going to be punitive.”