US yields climb after strong economic data

March 21 – US Treasury yields rose on Thursday after the release of strong economic data, including a report showing a drop in new claims for unemployment benefits, added to questions about the timing of expected interest rate cuts this year.

Yields on benchmark 10-year notes ticked up slightly to 4.272%. They closed at 4.271% on Wednesday after the Federal Reserve issued a policy statement and new economic projections affirming that it was still on track to cut interest rates three times this year.

Two-year yields ticked up to 4.636%, from their close of 4.604% on Wednesday.

The inversion in the yield curve between two-year and 10-year notes narrowed by 1.5 basis points to minus 36 basis points.

The release of recent data, including reports showing inflation is not falling as fast as had been hoped by Fed policymakers, has raised questions among traders about the widely expected June start to the US central bank’s rate cuts.

Fed Chair Jerome Powell said on Wednesday that despite recent inflation data coming in hotter than expected, the numbers “haven’t really changed the overall story, which is that of inflation moving down gradually, on a somewhat bumpy road.”

A string of economic data on Thursday helped boost yields.

The US S&P Global manufacturing purchasing managers’ index improved in early March to 52.5 from 52.2 in February, while the US Labor Department reported the number of people filing new claims for unemployment benefits unexpectedly fell last week, suggesting job growth remained strong in March. The National Association of Realtors also reported that US existing home sales
increased to a one-year high in February.

“Manufacturing has been a weak sector compared to services over this time, so a little bit of strength there certainly didn’t help,” said Ellis Phifer, managing director of fixed income research at Raymond James.

“The Fed has also been more tuned back towards the job market and its strength,” he said. Phifer added that “if nothing else, it’s the market digesting the flatter dot-plot curve that the Fed gave us yesterday, showing the three cuts this year but maybe taking a little bit off next year.”

Traders in federal funds futures have increased their bets that the US central bank will cut rates by June to 73%, according to CME Group’s FedWatch tool.

While further stronger-than-expected inflation prints could change the Fed’s course, Powell’s dovish comments assuaged some traders’ concerns about the rate-cut plan.

“The timing and pace are what’s a little frustrating, but as long as it’s moving in the right direction, the Fed should remain on track for cuts this year,” said Jack McIntyre, portfolio manager for global fixed income at Brandywine Global.

“I feel like inflation has had a couple of little bumps and that’s to be expected. But I think, as we have a conversation six months from now, inflation is still going to be well-behaved,” he added.

The US Treasury Department’s USD 16 billion auction of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday resulted in a high yield of 1.932% and a bid-to-cover ratio of 2.35. This compares to a high yield of 1.810% and a bid-to-cover ratio of 2.62 for the previous auction in January.

The Treasury also auctioned USD 85 billion in four-week bills and USD 85 billion in eight-week bills.

(Reporting by Matt Tracy; Editing by Paul Simao)