Yields on U.S. government debt advanced to their highest levels in a week Thursday after the Bank of England delivered its second consecutive rate increase and European Central Bank President Christine Lagarde said inflation risks in the eurozone are “tilted to the upside” relative to December.
The selloff in Treasurys, which pushed yields higher, partially reversed Wednesday’s buying action — leaving 10- and 30-year yields not far from where they were on Tuesday. Meanwhile, Wall Street and Washington are bracing for the worst U.S. jobs report in more than a year on Friday.
What are yields doing?
The yield on the 10-year Treasury note TMUBMUSD10Y, 1.830% rose 6 basis points to 1.825% from 1.765% at 3 p.m. Eastern on Wednesday.
The yield on the 30-year Treasury bond TMUBMUSD30Y, 2.151% climbed 5.1 basis points to 2.144%, up from 2.093% late Wednesday.
Those were the highest levels for the 10- and 30-year rates since Jan. 26, based on 3 p.m. levels, according to Dow Jones Market Data.
The 2-year Treasury yield BX:TMUBMUSD02Y advanced 3.6 basis points to 1.190% versus 1.154% Wednesday afternoon. That’s the highest level since Jan. 27.
What’s driving the market?
As expected, the Bank of England delivered its first back-to-back hike since 2004 at the conclusion of its policy meeting Thursday, by a 5-to-4 vote. The surprise to markets came as the four-person minority wanted a half-point rate hike. The Bank of England forecasts inflation will peak at 7.25% in April.
Meanwhile, the European Central Bank stood pat and affirmed the path for winding down pandemic-related asset purchases that it laid out in December. Lagarde, the ECB’s president, said there was “unanimous concern” among policy makers about inflation at Thursday’s policy meeting, and policy makers would make a more detailed assessment of the impact of higher-than-expected inflation in March.
Lagarde, who had previously called a 2022 rate increase unlikely, declined to reaffirm that position Thursday.
U.S. data released Thursday showed that new requests for U.S. unemployment benefits fell for the second week in a row. Initial jobless claims declined by 23,000 to 238,000 for the week ended Jan. 29 from a revised 261,000 in the prior week, as the record omicron wave receded and more people were able to go back to work. Economists surveyed by The Wall Street Journal had expected initial claims to fall to 245,000.
Fourth-quarter productivity rose 6.6%, while unit-labor costs came in at a lower-than-expected 0.3% for the same period after a revised 9.3% in the third quarter. A barometer of business conditions at service-style companies such as restaurants and retailers slid 2.4 points in January to a 11-month low of 59.9%, ISM said. And factory orders fell 0.4% in December.
Investors are watching for clues to the tightness of the labor market and how it could affect inflation, shaping the Federal Reserve’s policy path as it prepares to begin raising interest rates.
Economists expect January nonfarm payrolls to show a rise of 150,000 on Friday, though there’s some potential for a weak or even negative reading following Wednesday’s surprising private-sector payrolls report from Automatic Data Processing, which fell 301,000 in January. Weak January jobs data, however, isn’t seen putting a damper on the Fed’s plans.
The Senate Banking Committee held a confirmation hearing for Sarah Bloom Raskin, Lisa Cook and Philip Jefferson, nominated by President Joe Biden to fill seats on the Fed’s board. On Thursday, Sen. Cynthia Lummis, a Wyoming Republican, called for more scrutiny into the role that Raskin played in helping a fintech firm become the first to get a coveted, so-called “master account” at the Fed.
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What are analysts saying?
The BOE’s split decision was a “shock” to the market, said Ben Emons, managing director of global macro strategy at Medley Global Advisors. “The decision is exemplar of what a `front-loaded’ rate hike cycle could look like coming out of the pandemic. The Bank of England is saddled with similar problems as the Federal Reserve, and now the European Central Bank.”
“The cure for high rates is high rates themselves,” said Jeff Klingelhofer, co-head of investments and portfolio manager at Thornburg Investment Management. “That is, we have an overleveraged economy today that’s much more exposed to the potential of rising rates that will act as a natural break. But we also recognize that the right tail risk certainly exists.” In an email, Klingelhofer wrote that “one of the best ways into a rising interest rate environment is to have a notably shorter duration.”