US yields drop from multi-year highs, but rising trend intact
U.S. Treasury yields fell from multi-year highs on Thursday, as technical factors kicked in to stall their surge, even as the overall uptrend remained intact as the latest batch of data depicted a generally stable economy, though with some pockets of weakness.
U.S. five-year, seven-year, and 10-year yields hit fresh 16-year peaks, while those on 30-year bonds rose to their strongest level since April 2010. The yield on U.S. 20-year bonds, launched in May 2020, climbed to a record high.
On the shorter-end of the curve, U.S. three-year yields advanced to a 2-1/2-month peak.
Since the Federal Reserve’s decision on Sept. 20 to keep interest rates steady but maintain a hawkish stance, the 10-year yield has gained about 37 basis points (bps).
A closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, a harbinger of recession when it’s inverted, reduced its inversion to as low as – 43.20 bps, the tightest spread since May. The curve was last at -48.7 bps.
“The flows always dictate where rates are going. The consistent flow in this marketplace has been selling begetting selling and then we look for a catalyst to sort of stabilize the market and turn things around,” said Greg Faranello, Head of U.S. Rates Strategy at AmeriVet Securities in New York.
“Right now, the market is trying to stabilize a little bit but every time we stabilize and prices go up and yields come down, typically we find a way to technically reverse that. It still feels like a bear market though until the technical turn,” he added.
In afternoon trading, the yield on 10-year Treasury notes was last up 4.7 bps at 4.578%. U.S. 30-year bond yields were down 2.4bps at 4.707%.
Thursday’s U.S. data had little impact on the market.
Data showed the U.S. economy posted a fairly solid pace of growth in the second quarter. Gross domestic product (GDP) increased at an unrevised 2.1% annualized rate in the last quarter, according to the government’s final GDP estimate for the period. That was in line with economists’ expectations.
A second report from the Labor Department showed initial jobless claims rose 2,000 to a seasonally-adjusted 204,000 for the week ended Sept. 23. Economists had forecast 215,000 claims for the latest week.
“The jobless claims numbers are still constructive,” said AmeriVet’s Faranello. “The jobs numbers have slowed down…But we’re still printing 100,000 jobs, 150,000, even 200,000, and that’s going to keep the pressure on the Fed a little bit in the short term.”
The U.S. two-year yield, which typically reflects interest rate expectations, was down 7.9 bps at 5.062%.
In the meantime, the U.S. government is faced with the risk of a shutdown in three days, as the Senate and House on Thursday were due to push ahead with conflicting government funding plans.
Overall, analysts said the shutdown, if it happens, would have limited impact on the Treasuries market, except for the fact that the release of economic data will be suspended as well, providing little visibility on how the economy is doing.
Also on Thursday, the U.S. Treasury sold $37 billion in U.S. seven-year notes and the results were underwhelming. The note picked up a high yield of 4.673%, slightly higher than the expected rate at the bid deadline, suggesting that investors demanded a slight premium to buy the note.
Action Economics, in a blog after the auction, wrote that the $1 billion increase in offering size from $36 billion in August added to the underperformance
The bid-to-cover ratio, a gauge of demand, was 2.47,lower than last month’s 2.66 and the 2.51 average.
By: Gertrude Chavez-Dreyfuss