US yields rise as jobless claims unexpectedly fall

NEW YORK – US Treasury yields rose on Thursday after strong data, including an unexpected drop in jobless claims, led traders to cut bets that the Federal Reserve will make another 50-basis-point cut at its November meeting.

Initial claims for state unemployment benefits dropped by 4,000 to a seasonally adjusted 218,000 for the week ended Sept. 21. Economists polled by Reuters had forecast 225,000 claims for the latest week.

US economic growth also accelerated in the second quarter while gross domestic income growth was revised higher and the saving rate was raised.

“This morning’s data overall was pretty strong,” said Dan Mulholland, head of rates – sales & trading at Crews & Associates in New York.

“That put some pressure on the front-end of the market,” Mulholland added, saying that some unwinding of popular curve steepener trades and Treasury supply added to the move.

Traders are now pricing in a 51% probability that the Fed will cut rates by 50 basis points at the conclusion of its Nov. 6-7 meeting, down from 63% before the data, according to the CME Group’s FedWatch Tool.

Interest rate sensitive two-year yields were last up 6.8 basis points on the day at 3.621%.

Benchmark 10-year yields rose 0.8 basis points to 3.789% and earlier reached 3.821%, the highest since Sept. 4.

The yield curve between two- and 10-year notes flattened six basis points to 16.7 basis points. It reached 23.6 basis points on Wednesday, the steepest since June 2022.

The Fed is expected to prioritize the health of the labor market in its decision-making in the coming months as inflation recedes closer to its 2% annual target. A resurgence in price pressures, however, could disrupt the US central bank’s expected path of rate reductions.

The Fed last week kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that Fed Chair Jerome Powell said was meant to show policymakers’ commitment to sustaining a low unemployment rate now that inflation has eased.

Traders are still pricing in aggressive rate cuts going forward, with another 74 basis points of cuts expected by year-end, and 191 basis points in reductions by the end of 2025.

“The market is still, and has been, priced for more than the Fed suggests it will deliver, even in that ‘dot plot’ that was updated just a week ago,” said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte.

Fed policymakers said last week they expect another 50 basis points in cuts this year.

“When we think about the balance of risk to yields, we see them as more skewed to the upside as it seems tough for the Fed to potentially deliver as much as the market is expecting,” Griffiths said.

Yields fell on Tuesday and odds of a larger rate cut in November rose after data showed that US consumer confidence dropped by the most in three years in September amid mounting fears over the labor market.

This week’s main US economic focus will be the Personal Consumption Expenditures index for August on Friday.

Inflation expectations have risen off their recent lows on some expectations that price pressures could move higher as the Fed cuts rates.

Five-year breakeven rates, which measure expected annual inflation over that time period, were at 2.06% on Wednesday, up from 1.86% on Sept. 10, according to data from the St. Louis Fed.

The Treasury sold USD 44 billion in seven-year notes on Thursday to solid demand, the final sale of USD 183 billion in coupon-bearing supply this week.

The notes sold at a high yield of 3.668%, around a basis point below where they had traded before the auction. Demand was above average at 2.63 times the amount of debt on offer.

The Treasury also saw decent interest for a USD 70 billion sale of five-year notes on Wednesday and a USD 69 billion auction of two-year notes on Tuesday.

(Reporting by Karen Brettell, Editing by Nick Zieminski and Will Dunham)