30-year Treasury yield trades near November highs after ADP data, Fitch U.S. downgrade

What’s happening

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  slipped by 2.1 basis points to 4.891% from 4.912% on Tuesday.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  advanced 3.8 basis points to 4.086% from 4.048% Tuesday afternoon.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  rose 5.9 basis points to 4.163% from 4.104% late Tuesday. Tuesday’s level was the highest since Nov. 9, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

What’s driving markets

Data released on Wednesday showed that the U.S. added 324,000 private-sector jobs in July, according to payroll processor ADP, signaling the labor market remains healthy as businesses hired more workers to keep up with demand.

The ADP data plus Friday’s nonfarm payrolls report will feed into the Federal Reserve’s calculations on whether to continue tightening monetary policy, though the ADP report is seen as having a poor track record of foreshadowing the government’s official employment report.

While equities showed signs of stress after Fitch downgraded the U.S. government’s credit rating, the Treasury market took the news in its stride, with yields little changed before the ADP report. Analysts noted that during a previous downgrade, the U.S. government bond market rallied because investors remained attracted to its perceived haven status.

Meanwhile, markets are pricing in an 82.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25 basis point rate hike to a range of 5.50-5.75% at the subsequent meeting in November is priced at 28.5%.

The central bank is mostly expected to take its Fed funds rate target back down to around 5% or lower by next March or May.

On Wednesday, the U.S. Treasury published its August refunding statement. It said it is offering $103 billion of Treasury securities to refund about $84 billion of privately-held Treasury notes and bonds maturing in mid-August. The issuance will raise new cash from private investors of around $19 billion. 

The securities break down as follows:

• A 3-year note in the amount of $42 billion, maturing Aug. 15, 2026, to be auctioned at 1 p.m. Eastern time on Aug. 8.

• A 10-year note in the amount of $38 billion, maturing Aug. 15, 2033, to be auctioned at 1 p.m. Eastern time on Aug. 9.

• A 30-year bond in the amount of $23 billion, maturing Aug. 15, 2053, to be auctioned at 1 p.m. ET on Aug. 10. 

The balance of Treasury financing requirements over the quarter will be met with regular weekly bill auctions, cash management bills, and monthly note, bond, Treasury Inflation-Protected Securities, and 2-year Floating Rate Note auctions.

What analysts are saying

“While S&P’s August 2011 downgrade resulted in a sharp rally in Treasuries as investors counterintuitively flocked to U.S. debt as a safe haven asset amid a broader risk-off move, we generally expect the market’s reaction to Fitch’s downgrade to be more muted. Note that we do not expect any other significant action on the U.S. credit rating in the near-term,” said Gennadiy Goldberg, head of U.S. rates strategy, and rates strategist Molly McGown at TD Securities.

“Treasury investors remain much more focused on growth, inflation, and other top-tier data dynamics for direction. While any market price action on the downgrade should be short-lived, GSE [government sponsored enterprise] spreads could face some increased volatility as GSE ratings are likely [to] also be lowered in tandem with the U.S. ratings cut,” they wrote in a note.