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Bond Report: Treasury yields plunge on raft of U.S. data, handing 30-year rate biggest weekly decline since March 2020

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Treasury yields plummeted on Friday after U.S. economic data pointed to signs of slowing wage growth and broadening weakness in the economy, sending the policy-sensitive 2-year rate into its biggest one-day decline since November.

Meanwhile, the 30-year rate had its largest weekly drop in almost three years.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.282%

fell 19.1 basis points to 4.260% from  4.451%  on Thursday. That’s the biggest one-day decline for the 2-year rate since Nov. 10, based on 3 p.m. figures from Dow Jones Market Data. For the week, the yield dropped 13.9 basis points.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.566%

fell 15 basis points to 3.570% versus 3.720% Thursday afternoon. It declined 25.6 basis points this week.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.689%

declined 10.5 basis points to 3.692% from 3.797% late Thursday. It declined 24.2 basis points this week,  the largest one-week decline since the period that ended on March 6, 2020.

What drove markets

Data released on Friday showed the U.S. created 223,000 new jobs in December to mark the smallest increase in two years, though economists had expected a net 200,000 positions to be created. The unemployment rate slipped to 3.5% from 3.6% and hourly pay rose by a less-than-expected 0.3% last month.

Financial markets focused on the wage component of the jobs report as a possible sign that inflation pressures are easing and the Federal Reserve may be forced to eventually back off its interest rate hiking campaign. Traders priced in a more-than-50% chance of smaller-than-usual, quarter-of-a-percentage-point rate hikes by the Fed in February and March. They see a 74% probability of such a move in February and 66% chance of another in March, which would bring the fed-funds rate target to 4.75% to 5%, according to the CME FedWatch tool. Traders also boosted the chances of rate cuts toward the end of the year.

In other U.S. economic updates on Friday, the ISM services sector index contracted below the 50 level for December, and factory orders for November dropped 1.8%. This second raft of data, coming 90 minutes after December’s jobs report, led to the 10-year Treasury yield falling below 3.6% as traders interpreted the ISM number as a sign that the U.S. economy is broadly weakening.

Fed speakers throughout the day included Atlanta Fed President Raphael Bostic, who said the central bank needs to stay the course and that December’s jobs report didn’t change his view on monetary policy, and Fed Gov. Lisa Cook, who said “inflation remains far too high.”

What analysts are saying

“The solid 223,000 gain in nonfarm payrolls and drop-back in unemployment to a 50-year low in December will, at face value, do little to ease the Fed’s concerns about resilient core services inflation. That said, the softer gain in average hourly earnings suggests wage growth is nevertheless slowing, and we still think the labor market will weaken more markedly this year as the economy slips into recession,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Market Extra: Financial markets ignore elephant in the room: December’s 223,000 job gains

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