Yields gyrate in quiet holiday trade, pressured after 7-year sale

NEW YORK – The yield on the benchmark US Treasury note pared earlier gains on Thursday following a strong seven-year note auction, after earlier rising to an eight-month high in thin holiday trading in spite of weekly data showing a solid employment picture that should allow the Federal Reserve to adopt a less dovish stance in 2025.

Claims for unemployment insurance were 219,000 in the latest week, less than the previous period’s 220,000 and economists’ forecasts for 224,000.

The main event of the day was the seven-year note auction, which saw solid demand for the more than USD 44 billion sold, with high yield accepted of 4.532% about 2 basis points lower than where the when issued was trading around the close of bidding. The bid-to-cover ratio of 2.76 was the highest since 2.76 in March 2020.

Yields on the seven-year note fell following the auction and were last at 4.518%.

The 10-year yield following the auction was flat from its level late on Tuesday, before the Christmas holiday, at 4.588%. It earlier hit 4.641%, the highest level since May 2. The yield on the 30-year bond was just 0.5 basis points higher at 4.765%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up just 0.4 basis points to 4.334, after earlier reaching 4.367%.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 24.3 basis points, marginally flatter than Tuesday’s late spread at +24.8 bp.

Based on the fed funds futures term structure, traders see minimal chance that the Fed will ease at its January meeting, after delivering a quarter point cut earlier this month. That brought the fed funds target to 4.25%-4.50% and was its third since it became more accommodative in September, after leaving its target rate at 5.25% to 5.50% since July 2023.

Fed officials cite strong employment, solid growth, and slow progress in lowering inflation to its 2% target as possible reasons to let up on the easing. So, markets are pricing accordingly.

In fact the 10-year TIPS breakeven rate was last at 2.352%, indicating the market sees inflation averaging just under 2.4% a year for the next decade. The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.402%

According to LSEG data, traders don’t see another interest rate reduction until May and see a less than 50/50 chance of another 25 basis points from there by year-end.

(Reporting by Matt Tracy; Editing by Chizu Nomiyama)