Bond Report: Treasury yields’ gains fade after U.S. GDP report, jobless claims

Gross domestic product, the official scorecard for the U.S. economy, expanded at a 6.5% annual pace in the second quarter. The size of the economy has now returned to pre-pandemic levels after a short but deep recession last year. But economists polled by The Wall Street Journal had forecast an annualized 9.1% increase in GDP —one of the largest growth spurts on record.

Weekly jobless benefit claims, a proxy for layoffs, fell after hitting a two-month high,  suggesting the delta strain of the coronavirus hasn’t done much so far to harm the economy. Initial jobless claims declined by 24,000 to 400,000 in the week ended July 24, the government said Thursday. Requests for benefits had surged a revised 56,000 in mid-July.

The moves for bonds come a day after Federal Reserve officials suggested that the central bank is inching toward scaling back its monthly purchases of $120 billion in bonds, by signaling the process of tapering could begin this year.

Some analysts believe the Fed is setting the stage to start its rollback of accommodative policies by the end of 2021, with the Jackson Hole symposium of central bankers in late August and the Fed’s next policy meeting in late September as events when policy makers may more clearly signal their intentions.

U.S. stock indexes, aside from the technology sector, opened higher Thursday, and Hong Kong’s embattled Hang Seng
HSI,
+3.30%
index finished sharply higher, up 3.3%, after being pressured by a Chinese regulatory crackdown focused on technology companies domiciled in the People’s Republic.

Overseas, Germany’s 10-year yield
TMBMKDE-10Y,
-0.443%,
known as the bund, was trading around -0.433%, marking its lowest level since February.

The decline in global yields recently, with U.S. Treasury yields also trading around four month lows, has been attributed to growing concerns about the strength of the economic recovery from COVID-19, amid a spike caused by the delta variant of the coronavirus.

Moreover, yields adjusted for inflation, or real yields, are trading at or near record lows. The yield on the 10-year Treasury inflation-protected security, or TIPS, fell to -1.157% Thursday.

Investors may also be watching for the reception of a $62 billion auction of 7-year Treasury notes
TMUBMUSD07Y,
1.022%
at 1 p.m. ET.

Meanwhile, a bipartisan group of senators struck an agreement on a roughly $1 trillion infrastructure package, which will be watched closely by fixed-income investors for its potential impact on bond issuance to fund the initiative. The Wall Street Journal reports that completing the infrastructure package, which would provide for roughly $550 billion in spending above projected federal levels, is the first step Democrats hope to take toward approving much of President Biden’s agenda.

What strategists and traders are saying

“We continue to favor buying dips when 30yr yields rise to 1.98%/2% area and
when 10yr yields rise to 1.35%/1.38% area,” writes Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, in a daily note.

“We read the July FOMC statement and Powell’s press conference as guiding against a September decision on tapering but indicating that the taper decision will likely come in November or December with tapering beginning around the end of the year,” wrote Krishna Guha, vice chairman of Evercore ISI and a former top Fed staffer, in a Thursday research note.

“Post-meeting the real ten-year yield reached a new low of minus 118bp. There may be something of a Rorschach test operating here, with some in the markets taking dovish reassurance from the guidance against a September taper alongside an upbeat take on growth, and others seeing additional cause to be concerned that the Fed is not as attentive to downside risks as it should be and might still end up pulling back too soon to secure strong nominal growth for the medium term,” Guha wrote.