Bond yields rose on Thursday as traders continued to parse the latest Federal Reserve rate rise and comments, and looked ahead to jobs data at the end of the week.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.808%
rose by 3.7 basis points to 3.875%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.351%
gained 3.6 basis points to 3.379%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.701%
added 2.2 basis points to 3.708%.
What’s driving markets
Investors continued to absorb the Federal Reserve’s 10th rate hike in 14 months and accompanying comments, delivered Wednesday.
The market has inferred that the central bank has paused its tightening cycle and will now become more data dependent. To that end the nonfarm payrolls report on Friday may carry even greater heft than usual.
Markets are pricing in a 98% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its next meeting on June 14, according to the CME FedWatch tool.
The central bank is expected to take its Fed funds rate target back down to 4.4% by December, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Thursday include weekly initial jobless claims; first quarter productivity and unit labor costs; and the March trade deficit. All are due at 8:30 a.m. Eastern.
The European Central Bank is expected to raise borrowing costs on Thursday, though the market is unsure whether it will be by 25 or 50 basis points. Ahead of the decision, due at 8:15 a.m. Eastern, the German 10-year bund yield
TMBMKDE-10Y,
is up less than 1 basis point to 2.257%.
What are analysts saying
Analysts at Citi think the market is too dovish and there are more Fed hikes to come.
“The 25 basis point hike in the Fed fund rates to 5-5.25% is consistent with market expectations going into the May FOMC meeting. An important change to the policy statement with the committee dropping the phrase ‘anticipate further policy firming may be appropriate’ in favor of a more data dependent guidance is noteworthy,” said Joanna Chua, Citi strategist, in a note.
The bank expects high inflation prints in the run-up to the June FOMC, and expects the Fed to hike rates at both the June and July FOMC taking Fed fund rates to 5.5-5.75% , whereas the market expects there’s a 60% chance of a rate cut in July.
