Treasury yields inch higher after Powell’s rate-cut pushback as jobs data looms

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U.S. bond yields rose on Thursday as investors continued to digest comments from Federal Reserve Chair Jerome Powell and looked ahead to January jobs data in the coming days.

What’s happening

  • The yield on the 2-year Treasury
    BX:TMUBMUSD02Y
    climbed by 4.1 basis points to 4.250%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    rose 2.9 basis points to 3.948%.

  • The yield on the 30-year Treasury
    BX:TMUBMUSD30Y
    added 1.9 basis points to 4.192%.

What’s driving markets

Investors have pushed back the timing of the Federal Reserve’s first interest rate cut in 2024, but still expect the central bank to reduce borrowing costs this year by about 150 basis points.

After leaving its benchmark interest rates unchanged at a range of 5.25% to 5.50% on Wednesday, Fed Chair Jerome Powell said trimming borrowing costs at the next scheduled meeting in March was “not the most likely case or the base case.”

Markets are now pricing in a 64.5% probability that the Fed will leave interest rates unchanged in March, according to the CME FedWatch tool.

However, the chances of at least a 25 basis point rate cut by the subsequent meeting in May has moved up to 93.2%, and the central bank is still expected to take its Fed funds rate target back down to around 3.86% by December 2024, according to 30-day Fed Funds futures.

“The Fed says it has confidence in the outlook but needs ‘greater confidence’ before it starts normalizing its policy stance,” said Michael Gapen, U.S. economist at Bank of America.

“What constitutes greater confidence? More progress in reducing services inflation – and shelter inflation in particular – and slower wage growth,” he predicted.

With that in mind, investors will be looking towards the January nonfarm payrolls report published Friday, where expectations are that a net 185,000 jobs were created and month-on-month wage inflation will dip from 0.4% to 0.3%.

Ahead of that, U.S. economic updates set for release on Thursday include the weekly initial jobless claims report, alongside fourth quarter 2023 productivity, due at 8:30 am. Eastern. The final reading of the S&P manufacturing PMI survey for January will be published at 9:45 a.m. The January ISM manufacturing report is due at 10 a.m., along with December construction spending.

Also helping suppress yields on Wednesday were concerns about tension in the regional banking sector after shares in New York Community Bancorp 
NYCB,
-37.67%

plunged as the lender highlighted difficulties in commercial real estate.

The development serves as a stark reminder that commercial real estate concerns continue to loom large said Stephen Innes, managing partner at SPI Asset Management, “[and] likely contributed to the flight to safety observed in the bond market.”

The Bank of England is expected at 7 a.m. Eastern Thursday to leave interest rates unchanged at 5.25%.



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