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Bond Report: 10-, 30-year Treasury see largest 1-day yield drop in 6 weeks

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Long-dated U.S. government bond yields retreated Thursday, supported by buying that drove rates lower and prices higher, with strategists pointing to bargain hunting by fixed-income investors in a market viewed as slightly oversold in recent days.

The retreat in yields comes even as the Federal Reserve appeared to signal its readiness, when the time is appropriate, to scale back its accommodative policies—a move that would weigh on bonds eventually, driving yields higher.

How are Treasurys performing?
  • The 10-year Treasury note yield
    TMUBMUSD10Y,
    1.624%

    was at 1.631%, off by about 4.9 basis points from Thursday’s level at 3 p.m. Eastern Time. The yield move reflected the biggest such one-day slide since April 15, according to Dow Jones Market Data.
  • The 30-year Treasury bond
    TMUBMUSD30Y,
    2.330%

    was at 2.341%, pulling back 4.5 basis points, also marking its steepest daily slide since mid-April.
  • The 2-year Treasury note
    TMUBMUSD02Y,
    0.153%

    yielded 0.151%, off 0.6 basis point.

Bond prices rise as yields fall, and vice versa.

The move in long-date bonds followed its largest one-day yield rise in a week.

What’s driving the market?

Government bond yields headed lower Thursday, despite Fed minutes released on Wednesday that may serve as a reminder that expectations are for rates to head higher sooner than later.

The key wording for fixed-income investors from the minutes was this line:

“A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in coming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

On Thursday, the data was mixed and seemed insufficient to support tapering soon.

Weekly data on those seeking unemployment insurance showed that initial unemployment claims through regular state programs dropped to 444,000 last week, marking a new low level since the pandemic hit in mid-March 2020.

Meanwhile, the Conference Board Leading Economic Index saw a second consecutive solid gain in April, a sign the economy’s recovery from the pandemic is gathering momentum.

Separately, a Philadelphia Fed gauge of regional factory activity declined in May, pulling back from a 50-year high in April.

Tapering isn’t expected to start imminently butWednesday’s minutes start the process of talking about pulling back on the Fed’s $120 billion a month asset-purchase programs that helped financial markets get through the worst of the pandemic-inspired disruptions last year.

Meanwhile, an auction of $13 billion in10-year Treasury-inflation protected securities, or TIPs, was seen as “fair” by market participants. Break-even rates, a market-rate measure of inflation expectations, fell modestly after the auction to around 2.44%.

What are strategists saying?

“Treasurys found solid footing on Thursday, which is arguably an accomplishment given the rebound in risk assets and the lingering taper chatter in the wake of Wednesday’s FOMC Minutes,” wrote BMO Capital Market’s strategists Ian Lyngen and Ben Jeffery, in a note.

“With momentum curling from nearly-oversold levels and the bulk of this week’s events effortlessly absorbed and 10-year yields still at just 1.63%, we’ll continue to err on the side of skewing the forward path for 10- and 30-year rates lower as next week offers the short-end auctions ahead of month-end. Even in the context of the Fed’s acknowledgment that the conversation regarding the pace of asset purchases will be on the radar in the coming months, the reality remains that both tapering timing and the outright level of Treasury yields are beholden to the performance of the real economy,” the strategists said.

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