2 and 10 year Treasury yields jump to one-week highs after weekly jobless claims

Investors sold off U.S. government debt on Thursday, sending 2- and 10-year yields to their highest levels in a week, after data on initial jobless claims pointed to continued labor-market strength ahead of the next Federal Reserve policy meeting.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.841%
jumped 8.4 basis points to 4.837% from 4.753% on Wednesday. Thursday’s level is the highest since July 11, based on 3 p.m. Eastern time figures from Dow Jones Market Data. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.846%
rose 11.2 basis points to 3.853% from 3.741% on Wednesday afternoon. Thursday’s level is the highest since July 12.
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.898%
advanced 7.2 basis points to 3.910% from 3.838% as of late Wednesday.

What drove markets

Data released on Thursday showed that initial jobless benefit claims fell last week to a two-month low of 228,000 — reaffirming the strength of the U.S. jobs market.

The report added momentum to the selloff in government debt as traders considered its impact on the Fed’s most likely policy trajectory. Policy makers are currently in their traditional media blackout mode ahead of next Wednesday’s interest-rate decision.

Markets priced in a 99.8% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.5% next week, according to the CME FedWatch Tool. The chance of another hike of the same size by November, which would take the fed funds rate to 5.5%-5.75%, was seen at 31.2% — up from 25.3% a day ago.

The central bank is mostly expected to take its fed funds rate target back down to around 5% or lower in 2024.

In other data released on Thursday, the Philadelphia Fed’s manufacturing gauge remained in negative territory for the 11th straight month. It came in at negative 13.5 in July versus negative 13.7 in the previous month. Any reading below zero indicates deteriorating conditions.

Separately, sales of previously owned homes fell by 3.3% to an annual rate of 4.16 million in June, amid low inventory. Meanwhile, the Conference Board’s leading economic index dropped 0.7% in June, falling for the 15th month in a row.

What analysts are saying

“Overall, it was a bond-bearish round of data that contributed to the perception of the resilience of the U.S. economy,” said BMO Capital Markets strategist Ian Lyngen. “We’re doubtful these releases will shift [Fed Chairman Jerome] Powell’s tone when the FOMC hikes next week, but will keep the front-end of the curve under pressure.”

“The curve is entering a pivotal zone and the opening gap at -108.5 bp to -107.3 bp looms as an important technical level” for the spread between 2- and 10-year yields, he wrote in a note.

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