US bonds keep bearish tone after strong jobs data

NEW YORK, Jan 18 – US Treasury yields inched higher on Thursday after data showing job growth remains solid, which strengthened the argument of central bank officials in recent days that they will not rush to lower interest rates.

Yields, which move inversely to prices, had declined overnight partly because of a flight to safety to US Treasuries amid fears of an escalation of the conflict in the Middle East after Pakistan fired a retaliatory strike at Iran.

But the bearish bias that characterized the bond market this week took hold again after the Labor Department said on Thursday that the number of Americans filing new claims for unemployment benefits fell last week to the lowest level since late 2022, suggesting job growth likely remained solid in January.

The data followed a series of economic indicators in recent days pointing to resilience in the economy despite interest rates remaining at their highest level in decades, suggesting the Federal Reserve may not move toward less restrictive monetary conditions as fast as the market expected.

“This certainly supports the view that maybe (rate cuts) will not be in March and maybe it will be in June,” said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital. “But, in the grand scheme of things, inflation is dropping like a rock and they will be cutting this year. The question is how many.”

Short-term rate futures markets on Thursday were still signaling consensus around a first rate cut in March, even though that had a 55% probability, down from 70% last week. Meanwhile, the probability of a first rate cut in May was at 46%, up from 30% last week, according to CME Group data.

“The March rate cut odds are slipping through the fingers of the market … time is ticking right now and the data has been really strong,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

Atlanta Federal Reserve President Raphael Bostic said on Thursday he was open to lower rates sooner than he had anticipated, depending on how quickly inflation falls, but that the baseline was for rate cuts to start in the third quarter.

Benchmark 10-year yields gained 4 basis points from Wednesday to 4.144%, and yields were also higher for other medium- to long-term maturities. Two-year yields were unchanged at 4.356% after jumping on Wednesday.

The curve comparing two- and 10-year yields, which when inverted is generally seen as a harbinger of recession, steepened slightly to minus 21.7 basis points. Still, earlier this week the yield spread between the two maturities went to about minus 16 basis points – the smallest inversion of that part of the curve since November.

On the supply side, the Treasury department saw strong demand for an USD 18 billion 10-year Treasury Inflation-Protected Securities (TIPS) auction. The notes were sold at a high yield of 1.81%, more than 2 basis points below the expected rate at the time of the bid deadline, a sign that investors did not demand a premium to absorb the issuance.

The bid-to-cover ratio, a measure of demand, was 2.62, above a one-year average of 2.44. Indirect bidders took down 79% of supply, compared with a one-year average of 76%.

Post-auction, US 10-year real yields declined to 1.804%. The breakeven rate – a proxy of inflation expectations over the next 10 years – stood at 2.34%, up from 2.174% at the end of last year.

(Reporting by Davide Barbuscia; Editing by Bernadette Baum and Jonathan Oatis)