Curve steepens as US jobless claims rise

A closely watched part of the Treasury yield curve steepened on Thursday as an uptick in unemployment claims added to the view that the Federal Reserve is likely to begin cutting interest rates in September.

Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 243,000 for the week ended July 13, the Labor Department said on Thursday. Economists polled by Reuters had forecast 230,000 claims for the latest week.

“That’s a little bit weaker than expected … and you’re seeing the curve steepen a little bit on that,” said Dan Mulholland, head of rates – trading and sales at Crews & Associates in New York.

Interest rate-sensitive two-year yields were last up 3.4 basis points on the day at 4.463% and benchmark 10-year yields rose 4.4 basis points to 4.19%.

The yield curve between two-year and 10-year notes steepened one basis point on the day to minus 27 basis points.

Betting on a steeper yield curve has been a popular trade on expectations that shorter-dated yields will decline faster than longer-dated ones as the Fed gets closer to cutting rates.

But high inflation relative to other more recent rate cut cycles, and the likelihood that an economic slowdown will not be severe, could limit the move, said Stephen Gola, head of US Treasuries Sales & Trading at StoneX Group in New York.

“The fiscal tailwinds are so strong that it’s going to be hard to get the kind of recession that’s going to force rates much lower,” he said.

Traders are currently pricing for the federal funds effective rate to fall to around 3.45%, from 5.33% today. It had traded near zero after the spread of COVID in 2020 until early 2022 and from around 2009 to 2015 in the aftermath of the financial crisis.

Yields have tumbled this month as softer jobs data and easing inflation boost the odds of rate cuts.

Fed officials including New York Fed President John Williams on Wednesday cited progress in bringing inflation back closer to their 2% annual target, but also said that they want to see further improvement before cutting interest rates.

That leaves traders focused on economic releases for further clues on Fed policy.

A rate cut in September as seen as a sure thing, while a reduction at the Fed’s July 30-31 meeting is seen as having very low odds. Traders will watch comments from Fed Chair Jerome Powell at the July meeting for any firm signals that a rate cut is coming in September.

Market participants are also focused on the US Presidential election in November, which Donald Trump is seen as the leading candidate to win.

Trump’s odds of winning the presidency increased after he survived an assassination attempt on Saturday. Online betting site PredictIt showed bets of an election win at 64 cents for Trump, up from Friday’s 60 cents, with a victory for Kamala Harris at 31 cents and Joe Biden at 11 cents.

The Treasury Department saw soft demand for a 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday.

The debt sold at a high yield of 1.883%, more than one basis point above where it traded before the auction. Demand was 2.38 times the amount of debt on offer.

(Reporting By Karen Brettell, Editing by Nick Zieminski)