Long-dated yields fell, while short-dated yields rose, on Thursday after strong economic data but weak expectations for future inflation strengthened the likelihood the Federal Reserve would raise rates more aggressively next year.
What did Treasurys do?
The 10-year Treasury yield TMUBMUSD10Y, +0.19% ticked higher 0.7 basis point to 2.346%. The 2-year note yield TMUBMUSD02Y, +0.46% rose 2.4 basis points to 1.811%. The 30-year bond yield TMUBMUSD30Y, +0.13% added 2.8 basis points to 2.710%.
Bond prices move in the opposite direction of yields.
What’s driving markets?
The yield curve, a line tracing a bond’s maturities and its respective yield, flattened after the Fed’s rates projections and economic forecasts on Wednesday highlighted the central bank’s willingness to normalize monetary policy regardless of a lack of inflation. Investors suggested expectations of further hikes have sped up the curve’s flattening as it demonstrated the Fed was not patient enough for inflation to pick up before taking action.
Long-dated yields were also capped after European Central Bank President Mario Draghi repeated his customary dovish remarks, saying an “ample degree” of stimulus was still needed to boost inflation. That helped frustrate expectations the central bank would shift its language from easing to tightening in anticipation of a conclusive end to its bond purchases in Sept. 2018.
Holders of U.S. government paper watch European interest rates closely as they tend to move in lockstep with U.S. rates, with some analysts saying that low European yields have kept a lid on Treasury rates.
See: 3 takeaways from Draghi’s ECB news conference
A raft of solid economic data helped to lift short-term yields, which are sensitive to Fed policy. This comes in the wake of a weak consumer-price index figure on Wednesday that drew bond buying. Retail sales for November rose 0.8%.
“Earlier this year, the Fed signaled an unwillingness to be deterred by lowflation in its attempt to put a ‘gradual removal of accommodation’ plan into practice. This became most evident to the market at the September FOMC meeting when the preceding series of disappointing core-inflation reads didn’t shift the Fed’s dot-plot or tapering ambitions,” wrote Ian Lyngen and Aaron Kohli, fixed-income strategist at BMO Capital Markets. The dot plot is an aggregate of the senior Fed officials’ estimates of future interest rates.
What else are on investors’ radar?
Initial weekly jobless claims for the 7-day period ending Dec. 9 rose by 11,000 to 225,000 compared with an expected 235,000.
What did other assets do?
European bonds took a cue from the U.S. trading action. The 10-year German bond yield TMBMKDE-10Y, -4.52% was barely changed at 0.310%. The 10-year French bond yield TMBMKFR-10Y, -2.93% edged higher a basis point to 0.644%.