Treasuries rallied on Thursday morning, sending yields lower as traders weighed a range of factors including comments from a member of the European Central Bank, the outlook for US-Taiwan trade talks and the Japanese demand for US government bonds.
What is happening
The 2-year Treasury yield TMUBMUSD02Y, at 3.220%, fell to 3.221% from 3.293% on Wednesday, its highest since June 14 based on 3pm levels. The 10-year Treasury yield TMUBMUSD10Y, at 2.853%, eased to 2.85% from 2.894% late Wednesday. The 30-year Treasury yield TMUBMUSD30Y, at 3.116%, fell to 3.11% from 3.146% late Wednesday.
What is driving the markets
The US produced a lack of market news on Thursday. Data released Thursday showed that initial jobless claims fell by 2,000 to 250,000 in the first week of August, suggesting no sign of an increase in layoffs. Meanwhile, business activity among Philadelphia-area manufacturers expanded in August, but demand remains weak, according to data from the Federal Reserve Bank of Philadelphia. And existing home sales fell nearly 6% in July.
The lack of major economic data from the United States caused traders to focus elsewhere. In Europe, member of the board of the European Central Bank Isabel Schnabel said the region’s inflation outlook has not improved, suggesting it favors another big interest rate hike next year, although recession risks remain.
And in geopolitics, the US agreed to hold trade talks with Taiwan in a new show of support for the island, which is battling tensions with its big neighbor China. Larry Milstein, senior managing director of sovereign debt trading at RW Pressprich & Co, said this development “could be the basis for some strength” in bonds.
Separately, demand for government bonds was seen from Japanese investors, with the 10-year yield recently hovering around the attractive 2.9% level, a second trader said.
Yields had risen on Wednesday after data showed Britain’s annual inflation rate topped 10% for the first time in more than 40 years, raising fears that many economies have yet to peak of inflation
Also, minutes from the Federal Reserve’s July policy meeting showed that while the central bank was wary of excessive policy tightening, it was in no mood to stop raising rates interest, as it aims to curb an annual inflation rate in the United States that did not exceed 41. – year high.
“We saw the possibility that the July FOMC minutes sounded hawkish relative to the dovish interpretation of the meeting itself. Instead, the minutes were fairly neutral and, in any case, initial interest rates had re-rated a policy more brutal after the meeting,” said Andrew Hollenhorst, US economist at Citi.
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Markets are pricing in a 63.5% chance that the Fed will raise interest rates by another 50 basis points to a range of 2.75% to 3.00% at its meeting on the 20th-21st of September The central bank is expected to take its borrowing costs to between 3.5% and 3.75% next March, according to fed funds futures traders.
The Treasury will hold an auction at 1:00 PM Eastern, offering $8 billion of 30-year TIPS.
What the analysts say
“We hit a level around 2.9% in 10-year notes and held, and that’s really why we’re recovering,” said trader Tom di Galoma of Seaport Global Holdings in Greenwich, Connecticut. Also, there has been a “decent allocation from Japan to the US and it appears that there are a number of large Japanese accounts that are buying Treasurys.”
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 “go either way” when it comes to raising rates in 50 or 75 points. points at their next meeting, he said.