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U.S. Treasury yields rise to highest since mid-May as jobs data improves

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U.S. government bond yields rose Thursday, and the 2-year and 10-year Treasurys hit their highest yield since mid-May, following a report showing a jump in private sector employment last month, along with other data noting a fall in weekly jobless benefit claims to a new pandemic-era low.

The reports come ahead of the U.S. Labor Department’s May employment reading due on Friday, which will be more closely tracked by debt investors.

How Treasurys are trading
  • The 10-year Treasury note
    TMUBMUSD10Y,
    1.625%

    was yielding 1.624%, vs.1.591% from Wednesday’s level at 3 p.m. Eastern.

  • The 30-year Treasury bond rate
    TMUBMUSD30Y,
    2.299%

    was at 2.294%, compared with 2.280%.

  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.164%

    was yielding 0.158%, up 1.1 basis points.

The 2-year yield saw its largest one-day climb since April 26, bringing the short-term note to its highest rate since May 13, according to Dow Jones Market Data. The 10-year yield saw its largest daily rise since May 27, pushing it to its highest yield since May 21.

Fixed-income drivers

Thursday’s main attraction for fixed-income was the weekly report on U.S. jobless benefit claims and a monthly reading on private sector employment for May.

Private-sector employment surged by 978,000 in May, according to Automatic Data Processing Inc.’s National Economic Report, well above forecasts from economists surveyed by the Wall Street Journal and Econoday, which forecast a gain of 680,000 jobs and 627,000, respectively.

Separately, initial jobless claims dropped by 20,000 to 385,000 in the week ended May 29, the government said Thursday, marking the fifth decline in a row and a fresh low in the era of COVID. Economists surveyed by Dow Jones and The Wall Street Journal had forecast new claims would slip to a seasonally adjusted 393,000.

The employment reports serve as an appetizer to Friday’s U.S. Labor Department May jobs report, which is viewed as a potential catalyst for markets that have been range bound for weeks, as investors watch for further evidence that the U.S. economy is overheating in the rebound from the COVID pandemic.

SeeA lot is riding on May jobs report after recent U.S. hiring lull. 

Outside of labor market data, the Institute for Supply Management said its services survey rose to a record 64% in May from 62.7% in April. Also Thursday, IHS Markit said its final U.S. services purchasing managers index reading came in at 70.4 in May, its highest level since data began in 2009. A figure above 50 indicates growth in activity.

Against that backdrop, New York Fed President John Williams said Thursday that he still doesn’t think the central bank should start to slow down its asset purchases.

“I just don’t think the time is now to take any action,” Williams said, in an interview with Yahoo Finance.

Fixed-income investors were also keeping one eye on reports that President Biden was indicating flexibility in negotiating an infrastructure package that may mean no rise in the corporate tax rate.

The Wall Street Journal reported that during a Wednesday meeting with West Va., Republican Sen. Shelley Moore Capito, Biden presented a $1 trillion proposal, down from $1.7 trillion previously, and outlined options to pay for the spending that wouldn’t boost the corporate tax rate to 28% from 21%.

Separately, on Wednesday, the Fed announced that it would soon begin selling assets that it accumulated in its Secondary Market Corporate Credit Facility, or SMCCF.

The ICE U.S. Dollar Index
DXY,
+0.66%
,
a measure of the buck against a half-dozen currencies, also was up 0.6%, on Thursday as yields climbed.

What strategists and traders are saying

“Add a new suspense item to tomorrow’s payroll report. How much will trading volume rise in response to any number or surprise?” queried Jim Vogel, executive v.p. at FHN Financial in a Thursday note.  

“[Treasury] flows are near year-end holiday proportions because investors are waiting for the right combination of data and new developments before committing additional capital to bonds or returning to speculative trading. Economists know what they want to see in June and July, but the bond market only knows it hasn’t seen enough yet of whatever clues it is waiting for. Traders’ six-month zeal to run prices ahead of facts died much sooner than we anticipated even though we did expect a second quarter trading pause,” he wrote. 

He said that “May payroll numbers…will inform recovery headlines but not answer critical questions about consumption trends into the fourth quarter.”

 “If tomorrow’s nonfarm payroll report impresses, Treasury yields could surge and investors may take some risk off the table,” wrote Edward Moya, senior market analyst at Oanda in a daily note. 

“A substantial stock market pullback seems unlikely given the looming infrastructure deal, the economy still being early in the robust part of the recovery, and too much stimulus is still in the system,” wrote Moya.

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