Treasury yields finished mostly lower on Thursday, led by a decline in the 2-month rate, as traders weighed debt-ceiling concerns against signs of moderating inflation.
What happened
- The 2-month T-bill rate was 4.539% as of 3 p.m. Eastern time, down 43.4 basis points from Wednesday’s close of 4.973%, according to Tradeweb. Thursday’s level is the lowest since the end of March 2023. The 2-month rate is down 78.3 basis points from the May 4 close of 5.322%.
- The yield on the 2-year Treasury TMUBMUSD02Y, 3.983% rose less than 1 basis point to 3.906% from 3.899% on Wednesday. The yield is up four of the past five sessions.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.468% declined 3.4 basis points to 3.396% after factoring in new-issue levels.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.776% fell 5.1 basis points to 3.747% from 3.798% late Wednesday.
- Thursday’s levels were the lowest for the 10- and 30-year rates in about a week, based on 3 p.m. data from Dow Jones Market Data.
What drove markets
Trading in the 2-month bill was volatile on Thursday amid aggressive demand for the short-dated maturity, suggesting that investors and traders expect an eventual resolution to the debt-ceiling standoff.
Read: Here’s where investors may turn to ‘hide’ as U.S. debt-ceiling deadline looms based on 2011 market reaction
Data released on Thursday provided fresh evidence that inflation is moderating at the producer level. U.S. producer prices rose 0.2% in April, or less than economists polled by The Wall Street Journal had expected, and 2.3% over the past year, the smallest such increase since January 2021.
Initial weekly jobless claims rose by 22,000 to 264,000 for the week that ended May 6, the Labor Department said Thursday. That’s the highest level since October 2021.
In comments made on Thursday, Minneapolis Fed President Neel Kashkari said he is focused on the interplay between inflation, interest-rate policy, and then what strains that mix will put on the banking system.
Traders have become increasingly convinced that the 25-basis-point interest-rate hike by the Federal Reserve on May 3 will be the final one of this tightening cycle. Markets are pricing in an 88% probability that the Fed will leave interest rates unchanged at a range of 5%-5.25% on June 14, according to the CME FedWatch tool.
Traders briefly priced in a 50% chance that the first Fed rate cut could occur in July, before pulling back on those expectations as the day wore on. The central bank is still mostly expected to take its fed-funds rate target down to between 4.25% and 4.5%, or even lower, by December, according to 30-day fed funds futures.
Meanwhile, Treasury’s $21 billion auction of 30-year notes was “very strong,” according to strategist Ben Jeffery of BMO Capital Markets.
What analysts are saying
“The data remains consistent with end-of-cycle dynamics in the US: monetary policy is likely to be tight enough and this is increasingly reflected in the labor market, bank lending and inflation,” said Deutsche Bank strategists Francis Yared, Matthew Raskin and others.
“So far, the U.S. economy has not displayed the sharper moves typical of a recession. But the question is when, rather than if,” they wrote in a note on Thursday. The strategists said they “are positioned for the cycle to end sooner rather than later,” though “the timing may be delayed if the debt ceiling is resolved without a major impact on U.S. fiscal policy.”
