Benchmark 10-year Treasury yields were little changed on Thursday ahead of jobs data at the end of the week.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 5.053% slipped by 3.8 basis points to 5.033%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.995% retreated less than 1 basis point to 3.986%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.909% was barely changed at 3.898%.
What’s driving markets
Government bond markets paused for breath as investor absorb the latest guidance from Federal Reserve Chairman Jay Powell and look ahead to Friday’s nonfarm payrolls report.
Benchmark yields sit near cycle highs — the 2-year bond yield is at its richest in 15-years — after Powell acknowledged to Congress this week that stronger-than-expected economic data of late may require the central bank to speed up the pace of interest rate rises.
A strong nonfarm payroll report for February, due Friday, and a CPI inflation report due on March 14 that shows price pressures staying elevated, will likely encourage the Fed to hike rates by 50 basis points after its meeting in two weeks, investors reckon. The weekly initial jobless claims report will be published before this, on Thursday.
Markets are pricing in a 76.4% probability that the Fed will raise interest rates by another 50 basis points to a range of 5.0% to 5.25% after its meeting on March 22nd, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target to a peak of 5.65% by October 2023, according to 30-day Fed Funds futures. Just a month or so ago that ‘terminal rate’ was seen at 4.9% in June.
The Treasury will auction $18 billion of 30-year bonds on Thursday, following a poorly-received 10-year bond sale the day before.
What are analysts saying
“[T]he risks of a higher and faster hike trajectory have risen after Powell clearly lowered the bar for a 50bp hike in March, possibly in an attempt to dodge the mounting criticism that the Fed has fallen behind the inflation curve again. Still, the data will ultimately have the last say, and there is plenty of time and evidence to tip the scales back to 25bp, especially with the Fed in data-dependent mode,” said Stephen Innes, managing partner at SPI Asset Management.
“The headwinds that were helping to slow growth last year — bottlenecks, fading stimulus — are decreasing this year, providing the conditions for an economic re-acceleration. Such a rebound would often be welcomed. However, with inflation still running at almost 5%, central bankers remain concerned that too much growth could foster in a 1970s-style era of unanchored inflation expectations. As a result, look for the Fed to remain diligent in its fight against inflation. And one should position the terminal Fed funds rate to be as high as 5.75%,” Innes added.
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