Bond Report: 10-, 30-year Treasury yields remain near multi-year highs even as buyers re-emerge

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  declined 7.1 basis points to 5.071% from 5.142% on Wednesday. Thursday’s level is the lowest since Sept. 18, based on 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  slipped 2.9 basis points to 4.596% from Wednesday’s level of 4.625%, which was the highest since Oct. 16, 2007.

• The yield on the 30-year Treasury
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  declined less than 1 basis point to 4.728% from Wednesday’s level of 4.731%, which was the highest since Feb. 10, 2011.

• The 10- and 30-year rates ended Thursday at their second-highest levels of this year.

What drove markets

U.S. economic data released on Thursday showed that weekly initial jobless claims rose slightly to 204,000 last week from a revised 202,000 previously, with layoffs remaining extremely low and no sign of rising unemployment. In addition, second-quarter GDP grew at a solid 2.1% annual pace, based on revised figures, and the third quarter is shaping up to be even stronger. Pending home sales fell 7.1% in August.

Oil prices moved briefly above $95 a barrel earlier in the day, adding to the upward pressure on bond yields initially seen on Thursday and reviving concerns about inflationary pressures.

Yields drifted lower though as the New York afternoon wore on, however, as buyers emerged for intermediate- and long-term government debt — reversing the initial burst of selling.

The recent rise in long-dated U.S. government bond yields has caused nervousness among fixed-income and some stock-market investors. The ICE BofAML MOVE index, which tracks expected volatility in Treasurys, has risen 15% over the five-day period that ended on Wednesday.

Markets are pricing in an 80.7% probability that the Federal Reserve will leave interest rates unchanged at a range of 5.25%-5.5% on Nov. 1, according to the CME FedWatch Tool. The chance of 25 or 50 basis points of tightening to a range of either 5.5%-5.75% or 5.75%-6% by December is seen at 36%.

The central bank is not expected to take its fed funds rate target back down to 5% or lower until the second half of next year. The Fed’s favored inflation gauge, the core PCE index, will be published on Friday.

Treasury’s $37 billion sale of 7-year notes “was a bit soft,” according to BMO Capital Markets strategist Ben Jeffery.

What analysts are saying

“We remain of the opinion that the labor market is becoming increasingly vulnerable, but the turning point now looks to be further out on the horizon, likely at the end of this year or early 2024,” said Thomas Simons, a U.S. economist at Jefferies. “Businesses will struggle to pass on further price increases to an increasingly strained consumer, and margins will fall as inflation slows, leading to layoffs eventually. As with every other element of the economic outlook, it is taking longer to play out than expected.”