Yields on 10-year notes dip before jobs data

March 7 – Benchmark 10-year US Treasury yields dipped on Thursday but came off of one-month lows reached earlier in the day before highly anticipated US jobs data on Friday that may offer new clues on Federal Reserve policy.

The employment report for February is expected to show that employers added 200,000 jobs during the month.

It comes after unexpectedly strong jobs and inflation reports for January, which were attributed in part to seasonal factors.

Benchmark 10-year yields have fallen from almost three-month highs reached last month as investors price for the likelihood that the US central bank is getting closer to rate cuts.

“As we creep forward towards the first set of Fed rate cuts later this year, I expect yields to move a little bit lower,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

Fed Chair Jerome Powell said on Thursday in his second day of testimony to Congress that the US central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting interest rates.

That echoes his comments on Wednesday that interest rate cuts are still likely in coming months
but only if warranted by further evidence of falling inflation.

Yields fell after Powell’s statement on Wednesday as investors unwound hedges that were placed in case he took a more hawkish tone.

“There was a prospect that Powell could come out slightly more hawkish after January’s high inflation print, but he largely ignored it,” LeBas said.

Consumer price inflation for February due on Tuesday will be watched for signs that January’s larger-than-expected uptick in prices was an anomaly.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits was unchanged last week, though continuing claims rose to the highest level since last November.

Benchmark 10-year yields were last down one basis point on the day at 4.092%, after earlier reaching 4.054%, the lowest since Feb. 5.

Two-year yields fell 5 basis points to 4.514%. The inversion in the yield curve between two-year and 10-year notes narrowed by three basis points to minus 42 basis points.

Fed funds futures traders are pricing in a 72% probability the Fed will begin cutting rates in June, according to the CME Group’s FedWatch Tool.

Treasury yields fell earlier on Thursday after the European Central Bank (ECB) left interest rates unchanged as expected on Thursday but acknowledged that inflation is easing faster than once thought, potentially opening the way for rate cuts later this year.

That sent European bond yields lower, with markets now pricing in over 100 basis points rate cuts by the ECB this year.

Treasury yields were “following the move in Europe,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York. “It was kind of a dovish signal from the ECB.”

The US Treasury Department said on Thursday it will sell USD 117 billion in coupon-bearing supply next week, including USD 56 billion in three-year notes on Monday, USD 39 billion in 10-year notes on Tuesday, and USD 22 billion in 30-year bonds on Wednesday.

The amount banks and fund managers lent to the Fed in its reverse repurchase agreement facility dropped to USD 436.75 billion on Thursday, the lowest since mid-2021.

(Reporting By Karen Brettell, Editing by Franklin Paul and Diane Craft)