Bond Report: Treasury Yields Edge Lower As Investors Buy Bond-market Dip

U.S. Treasury yields ended lower Thursday as bond buyers found it difficult to resist a surge in government debt yields that briefly pushed them to their highest levels in several months.

What are Treasurys doing?

The 10-year Treasury yield TMUBMUSD10Y, -0.08%   was down 1.5 basis points to 1.907%, after touching a more-than-four-month high at 1.95%, while the two-year note rate TMUBMUSD02Y, +0.54%  fell 1.4 basis points to 1.619%. The 30-year bond yield TMUBMUSD30Y, -0.16%  declined 0.7 basis points to 2.343%.

What’s driving Treasurys?

An early morning selloff that helped to cheapen government debt prices shifted into reverse gear, as investors looking for a bargain snapped up Treasurys, analysts said.

Earlier in the day, economic optimism and a positive mood in risk assets from a phase-one trade deal had dampened values for government paper, pushing yields higher. The House of Representatives approved the USMCA trade pact, a revamp of the Nafta agreement, on Thursday.

In economic data, U.S. jobless claims fell in mid-December after a post-Thanksgiving holiday surge, returning closer to the extremely low level of layoffs that has prevailed over the past few years, and the Philadelphia Fed manufacturing index slumped to 0.3 in December, from 10.4 in the previous month.

Existing home sales fell 1.7% to an annualized pace of 5.35 million in November, from 5.44 million in October. Meanwhile, The Conference Board’s Leading Economic Index was unchanged in November, halting three straight months of declines.

An auction for $15 billion of Treasury inflation-protected securities (TIPs) drew strong appetite from investors, reflecting talk among institutional investors like Vanguard that inflation insurance was underpriced.

The five-year breakeven inflation rate, or the implied market-based inflation forecast from trading in the five-year TIPs note, stood around a seven-month high of 1.65% as of Tuesday.

Central banks were also in focus on Thursday as the Bank of England and the Bank of Japan both voted to keep interest rates unchanged at their central-bank meetings. The BOJ statement said the risk of an overseas slowdown weighing on domestic demand was “expected to be limited.”

One of the few central banks paring back their monetary accommodative policies, Sweden’s Riksbank raised its benchmark short-term interest rate to zero, pulling it out of negative territory for the first time in five years.

What did market participants say?

Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets, said the 10-year Treasury note yield’s brief surge to 1.95% was “too attractive a dip for buyers to pass up.”

“With the holidays approaching and books quickly being closed, we suspect the true durability of the latest [selloff] in the Treasury market will need to wait until the new decade,” he said.

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