U.S. Treasury yields bounced off their lows on Thursday as a surge in oil prices spurred by hopes of coordinated production cuts between Saudi Arabia and Russia helped to lift inflation expectations, a bugaboo for bondholders.
Investors also saw a back-to-back jump in U.S. weekly jobless claims, closing the curtain over one of the strongest labor markets in American economic history.
What are Treasurys doing?
The 10-year Treasury note yield TMUBMUSD10Y, +5.33% was virtually unchanged at 0.624%, off an intraday low of 0.567%, while the 30-year bond yield TMUBMUSD30Y, +2.93% was down 1.7 basis points to a three-week low of 1.268%, but up from a intrasession nadir of 1.207%.
The 2-year note rate TMUBMUSD02Y, +9.23% was down 1.4 basis points to 0.218%, around its lowest level since May 2013.
What’s driving Treasurys?
President Donald Trump said in a tweet that he had talked to Saudi Arabia and Russia, and that he expected to see oil production cuts of up to 15 million barrels a day.
His comments helped to push up oil prices and inflation expectations, based on trading in Treasury inflation-protected securities. Bond investors’ inflation prospects over the next decade, or breakeven rates, rose by around 11 basis points to around 1.03% on Thursday.
Higher oil prices and inflation pressures can weigh on government paper by eroding the value of their fixed-interest payments. The surge in inflation expectations in TIPs also reflected the lack of liquidity in certain corners of the Treasurys market, said market participants.
Trump’s comments helped to offset disappointing economic data that had provided a bullish tilt in early trading on Thursday. Americans filing for unemployment benefits for the weekly period ending March 28 surged by 6.65 million, following a 3.28 million rise in initial jobless claims in the week before. Economists polled by MarketWatch had forecast claims to surge by 4 million.
As an up-to-date indicator of the job market’s travails, the claims number highlights the disruptions that are threatening to throw the world’s largest economy into a recession.
In other data, the trade deficit fell $39.9 billion in February, down from $45.3 billion in January.
See: Jobless claims leap record 6.6 million at end of March as coronavirus triggers mass layoffs
What are market participants saying?
The surge in inflation expectations “speaks to how illiquid the TIPs market is,” said Michael Lorizio, senior fixed-income trader at Manulife Investment Management. “Pre-crisis, breakevens were anchored at a tight range. The problem is you’re continuing to see illiquid pockets in the Treasurys market like TIPs, which are illiquid even on its best day.”
“More people are applying for unemployment insurance as more segments of the economy are shutting down in the wake of the coronavirus,” said Andrew Smith, chief investment officer of Delos Capital Advisors, in a note.
“Companies will take a considerable amount of time to re-hire workers. The longer it takes for the economy to restart, the longer companies will take to get back into gear,” said Smith.
What else is on investor radars?
The Federal Reserve temporarily eased capital requirements for banks on Wednesday, allowing them to increase their balance sheets and lend out funds to households and businesses.
The Fed’s actions may encourage Wall Street’s near two dozen primary dealers to facilitate trading in the bond-market to ramp up their operations and soothe liquidity issues that briefly seized up liquidity in the Treasurys market last month, analysts said.
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