US yields rise after better-than-expected economic data

NEW YORK – US Treasury yields gained on Thursday after data showing persistent strength in the labor market and business activity, reinforcing expectations that the Federal Reserve will take its time cutting interest rates this year.

The benchmark US 10-year yield climbed to a more than one-week peak of 4.498% and was last up 4.1 basis points (bps) at 4.474%.

US 30-year yields rose 3.1 bps to 4.580%.

On the front end of the curve, the US two-year yield, which reflects rate move expectations, climbed to a roughly three-week high of 4.959%. It was last up 5.5 bps at 4.933%.

US yields drifted lower before Thursday’s data as investors consolidated positions in a week generally viewed as thin on economic reports.

Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 215,000 for the week ended May 18, data showed. Economists polled by Reuters had forecast 220,000 claims in the latest week.

That was followed by a report showing US business activity accelerated to the highest in more than two years in May. S&P Global’s flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month, the highest since April 2022. That followed a final reading of 51.3 in April.

Manufacturers also reported higher prices for a range of inputs, suggesting goods inflation is likely to accelerate in the coming months.

“The S&P PMIs never really used to make a difference, then all of a sudden it did (on Thursday). The only thing I can think of is … the pick-up in manufacturing, which was a little bit more than the market expected,” said Ellis Phifer, managing director, fixed income capital markets at Raymond James in Memphis, Tennessee.

“I guess there has been a dearth of activity. There was not a lot of reaction to the jobless claims. But when you think about the better-than-expected claims on top of the PMIs, a bored market decided to make a move,” Phifer added.

US new home sales, meanwhile, slumped in April to a weaker-than-expected 634,000, weighed down by the rise in mortgage rates. April sales were the slowest in pace since November.

Following the reports, US rate futures priced in one rate cut of 25 basis points in 2024, most likely starting in September or November, according to LSEG’s rate probability app. For the last few weeks, the futures market had been comfortable factoring in about two cuts amid the gradual decline in inflation and other economic indicators.

The US yield curve, meanwhile, deepened its inversion. The spread between US two- and 10-year yields widened to as much as minus 47.7 bps on Thursday following the PMI report, the deepest inversion since March 12. The curve was last at minus 46 bps US2US10=TWEB, compared with minus 45.1 bps late on Wednesday.

The current curve is effectively a “bear flattener,” in which short-term interest rates are rising more quickly than longer-dated ones. This is a scenario associated with the market-reducing rate cut forecasts.

“Overall, we’re just in consolidation mode, awaiting critical inputs,” said Vail Hartman, US rates strategist at BMO Capital in New York. “The next important number is the core PCE (personal consumption expenditures), but we can argue that the market has a pretty good sense where that would come in, given CPI (consumer price index) earlier and other inflation numbers.”

Hartman noted that the next important indicator after the PCE would be nonfarm payrolls for May, which comes out on June 7.

Also on Thursday, the Treasury’s USD 16 billion auction of 10-year Treasury Inflation-Protected Securities (TIPS) was poorly received, suggesting investors expect price pressures will decline in the coming years. The high yield was 2.184%, higher than the expected rate at the bid deadline, which meant that investors demanded a premium to take down the note.

The bid-to-cover ratio, a gauge of demand, was 2.33, slightly lower than the previous auction’s 2.35, and the 2.40 average.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama and Will Dunham)