Treasurys rallied Thursday morning, sending yields lower across the board, as investors weighed downbeat U.S. earnings, the prospects of an economic slowdown, and the chance of Federal Reserve rate hikes through June.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.182% slipped to 4.194% from 4.263% on Wednesday. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.548% retreated to 3.553% from 3.601% as of Wednesday afternoon.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.755% fell to 3.762% from 3.788% late Wednesday.
What’s driving markets
A lower open in stocks coincided with buying of government bonds as investors continued to weigh the prospects for an economic slowdown, easing inflation, and the trajectory of interest rate hikes by the Federal Reserve.
The Fed’s beige book of business anecdotes, published Wednesday, indicated lending in the U.S. declined after the failure of California’s Silicon Valley Bank, businesses hired fewer people in the early spring, and inflation also “appeared to be slowing.”
Fed funds futures traders are pricing in an 87% probability that the Fed will raise interest rates by another 25 basis points to a range of 5% to 5.25% on May 3, and a 27% chance of a similar-size hike in June, according to the CME FedWatch tool.
The central bank is still mostly expected to cut rates by December, according to 30-day Fed Funds futures.
In U.S. economic updates released on Thursday, weekly initial jobless claims climbed to 245,000 last week, signaling rising layoffs, and the Philadelphia Fed’s factory gauge slumped deeper into contraction in April.
Investors will hear from a lineup of Fed speakers on Thursday. Fed Gov. Christopher Waller will make comments at 12 p.m. Eastern time and Cleveland Fed President Loretta Mester will talk at 12:20 p.m. A Dallas Fed event with Dallas Fed President Lorie Logan and Fed Governor Michelle Bowman will begin at 3 p.m., and Atlanta Fed President Raphael Bostic will speak at 5 p.m.
What analysts are saying
Weaker German producer prices and lower-than-expected New Zealand consumer-price index data have been cited as the impetus for Thursday’s rally in Treasurys, said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery, in a note.
However, “we’ll attribute the momentum behind the buying interest as an acknowledgment of the fact there is little in the immediate future that will deter the range-trade that has come to define the price action in U.S. rates,” they wrote. “This isn’t to suggest that at some stage a breakout won’t be warranted; rather that such a move isn’t likely to find its origin in the known events of the next two weeks.”