Bond Report: 2-year Treasury yield hits an almost 2-year high as Fed’s Bullard says first rate hike could come as soon as March
The two-year Treasury yield led an advance in rates on Thursday after Federal Reserve Bank of St. Louis President Jim Bullard said the first interest-rate increase could come as soon as March.
The move extended the rise in yields that followed the release of minutes from the Federal Reserve’s December meeting, which showed policy makers discussed more aggressive rate increases and the possibility of shrinking the central bank’s nearly $9 trillion balance sheet.
What are yields doing?
The 2-year Treasury yield TMUBMUSD02Y, 0.877% rose 5.2 basis points to 0.88%, up from 0.828% Wednesday afternoon. Thursday’s level was the highest for the 2-year rate since Feb. 27, 2020, based on 3 p.m. levels, according to Dow Jones Market Data.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y climbed 3 basis points to 1.733%, up from 1.703% at 3 p.m. Eastern on Wednesday. The yield has risen 23.7 basis points to begin 2022. Yields and debt prices move opposite each other.
The yield on the 30-year Treasury bond TMUBMUSD30Y, 2.081% rose less than 1 basis point to 2.093%, compared with 2.086% late Wednesday. That’s the highest level since Oct. 21.
What’s driving the market?
On Thursday, Bullard said omicron variant cases are expected to subside in the weeks ahead, the first rate hike could come as soon as March, and a balance sheet runoff is one of possible next steps for monetary policy. Bullard is a 2022 voting member of the rate-setting Federal Open Market Committee.
Bullard’s comments reinforced the hawkish shift reflected in Wednesday’s release of the minutes from the FOMC’s Dec. 14-15 meeting, which showed policy makers felt it might be necessary “to increase the federal-funds rate sooner or at a faster pace than participants had earlier anticipated.” The summary also showed that Fed officials had a wide-ranging discussion of how to move away from its current easy stance by hiking rates and shrinking its balance sheet.
Data released early in the session showed that weekly jobless claims edged up to 207,000 but clung near a 52-week low, while the trade deficit widened sharply to $80.2 billion in November from a revised $67.2 billion in the prior month as imports surged.
Meanwhile, U.S. factory orders showed continued strength in November, with orders for U.S. manufactured goods rising 1.6%. That’s the 18th gain in the last 19 months. Separately, the Institute for Supply Management’s reading on activity in the services sector dropped to 62% last month from a record 69.1% in November. Readings above 50% signal expansion and numbers above 60% are considered exceptional.
Friday’s December jobs report looms for traders. Economists surveyed by The Wall Street Journal look for nonfarm payrolls to show a rise of 422,000, with the unemployment rate falling to 4.1% from 4.2%. Economists say risks to the jobs reading are skewed to the upside after a much stronger-than-expected reading Wednesday on December private-sector jobs from ADP.
What are analysts saying?
“The late-December COVID surge likely came too late to prevent a pickup in payrolls after the gain in November appeared to be held down by an overly aggressive seasonal adjustment factor. We forecast a 500k rise,” a team of TD Securities strategists wrote in a note. “The rates market is arguably priced for a good report but the market is skittish given the hawkish message from the December FOMC minutes.”