Treasuries rallied on Thursday morning, dragging yields lower, as traders weighed a range of factors including comments from a member of the European Central Bank, the outlook for U.S. trade talks and Taiwan and Japanese demand for US government bonds.
What is happening
The 2-year Treasury yield TMUBMUSD02Y,
slipped to 3.221% from 3.293% on Wednesday, its highest since June 14 based on 3 p.m. levels.
The 10-year Treasury yield TMUBMUSD10Y,
fell to 2.85% from 2.894% on Wednesday afternoon.
The 30-year Treasury yield TMUBMUSD30Y,
fell to 3.11% from 3.146% on Wednesday evening.
What drives the markets?
The United States produced a lack of news on market developments on Thursday. Data released Thursday showed initial jobless claims fell by 2,000 to 250,000 in the first week of August, suggesting no signs of an increase in layoffs. Meanwhile, business activity for Philadelphia-area manufacturers increased in August, but demand remains weak, according to data from the Federal Reserve Bank of Philadelphia. And sales of existing homes fell almost 6% in July.
The lack of major economic data in the US pushed traders elsewhere. In Europe, member of the board of directors of the European Central Bank Isabelle Schnabel said the region’s inflation outlook had not improved, suggesting it favored another big hike in interest rates even as recession risks firmed.
And in geopolitics, the United States has agreed to hold trade talks with Taiwan in a further show of support for the island, which is battling tensions with its big neighbor China. The move “could underpin some strength” in bonds, said Larry Milstein, senior managing director of government debt trading at RW Pressprich & Co.
Separately, demand for government bonds could be seen from Japanese investors and the 10-year yield has been hovering around the attractive 2.9% level recently, a second trader said.
Yields rose on Wednesday after data showed the UK’s annual inflation rate topped 10% for the first time in more than 40 years, raising fears that many economies had yet to peak of inflation.
Furthermore, the minutes of the Federal Reserve’s policy meeting in July showed that while the central bank was wary of excessive policy tightening, it was nevertheless in no mood to stop tightening. raise interest rates as it sought to dampen an annual U.S. inflation rate just below a 41-year high.
“We saw that the July FOMC minutes could appear hawkish compared to the dovish interpretation of the meeting itself. Instead, the minutes were fairly neutral and, in any case, initial interest rates had reassessed a more hawkish policy after the meeting,” said Andrew Hollenhorst, US economist at Citi.
Lily: Has the stock market “misinterpreted” the Fed again? What strategists say about the reaction to the July minutes
Markets are pricing in a 63.5% chance that the Fed will raise interest rates an additional 50 basis points, to a range of 2.75% to 3.00%, at its September 20-21 meeting . The central bank is mostly expected to cut its borrowing costs to between 3.5% and 3.75% by next March, according to fed funds futures traders.
The Treasury will hold an auction at 1 p.m. EST offering $8 billion worth of TIPS over 30 years.
What analysts say
“We’ve come in at around 2.9% on 10-year bonds and we’ve held, and that’s really why we’re rallying,” said trader Tom di Galoma of Seaport Global Holdings in Greenwich, Connecticut. Additionally, there has been “a decent allocation from Japan to the US and there appear to be a number of large Japanese accounts buying Treasuries.”
Meanwhile, given Thursday’s risky moves in stocks, “people are still trying to figure out what the Fed is doing,” with the idea that policymakers could be “going either way” when it comes to to raise rates by 50 or 75 basis points at their next meeting, he said.