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Bond Report: Treasury yields extend rise after U.S. GDP reading, other economic data


Treasury yields extended a rise on Thursday following a stronger-than-expected reading on U.S. fourth-quarter economic growth, as improved risk appetite in markets reduced demand for government bonds.

What’s happening

The yield on the 2-year Treasury note

rose 4.1 basis points to 4.176% at 3 p.m. Eastern. Yields and debt prices move opposite each other.

The yield on the 10-year Treasury note

rose 3 basis points to 3.491%.

The yield on the 30-year Treasury bond

climbed 0.5 basis to 3.627%.

What’s driving markets

A positive tone in equity markets was curtailing demand for fixed income products, nudging up Treasury yields.

Yields initially added to their rise after data showed fourth-quarter U.S. gross domestic product rose at a 2.9% annualized pace, topping expectations for a 2.8% reading, though economists cautioned the backward-looking data could mark a last gasp of solid growth. The economy is widely expected to slow sharply in 2023, with some economists arguing a recession may have already begun.

Yields trimmed their rise later in the session.

See: U.S. economy grew a sturdy 2.9% at the end of 2022, GDP shows, but don’t look for a repeat soon

Amid expectations for a slowdown, investors look for the Federal Reserve to downshift the size of rate increases after delivering a series of outsize hikes in 2022.

Markets are pricing in a roughly 99% probability that the Fed will raise its benchmark interest rate by 25 basis points to a range of 4.50% to 4.75% after its meeting on Feb. 1, according to the CME FedWatch tool, as the central bank seeks to curb inflation running at more than three times its 2% target.

The central bank is expected to take its fed-funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures. Fed officials have indicated they expect rates to peak above 5% and remain there for some time.

In other economic data, initial jobless claims rose by 6,000 to 186,000 in the week ended Jan. 21, the Labor Department said Thursday. Economists polled by The Wall Street Journal had estimated new claims would rise 15,000 to 205,000.

Orders for manufactured goods rose 5.6% in December thanks to a flush of new contracts for Boeing passenger planes, but business investment was weak again in another sign of a corroding U.S. economy. If transportation is set aside, new orders fell 0.1% last month, while a key measure of business investment also declined for the second time in four months.

An auction of $35 billion in 7-year Treasury notes was the latest sale to be met with strong demand. The 7-year note auction stopped 2.1 basis points short of the 1 p.m. when-issued bid, the farthest through that a 7-year auction has stopped short since August, noted Thomas Simons, money-market economist at Jefferies, in a note.

What are analysts saying

“The most current fundamental update on Thursday came in the form of initial jobless claims, which declined to just 186k for the week of Jan. 22 — too late in the month to be influential for NFP (nonfarm payrolls) estimates for next week. Nonetheless, the outright level of claims is consistent with the ongoing strength in the labor market that continues to provide the FOMC (Federal Open Market Committee) with not only cover to tighten further but increasingly with justification in light of the Committee’s objective of seeing a higher unemployment rate before flying the mission accomplished banner on re-establishing price stability,” said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a note.

Market Snapshot: S&P 500 rallies to close at nearly 2-month high, Nasdaq advances 1.8% as investors digest GDP report, earnings

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