TREASURIES-U.S. yields pause recent drop before key employment report

By Herbert Lash NEW YORK, April 6 (Reuters) - Treasury yields held steady on Thursday following recent sharp declines after the number of Americans filing new claims for unemployment benefits fell last week, giving the market pause a day before a key unemployment report. The picture of the labor market was unclear following revisions to prior claims data after the U.S. government updated the model it uses to adjust the series for seasonal fluctuations. Initial claims for state unemployment benefits fell 18,000 to a seasonally adjusted 228,000 for the week ended April 1, the Labor Department said. Data for the prior week was revised to show 48,000 more applications than previously reported. Economists polled by Reuters had forecast 200,000 claims for the latest week. Bonds have rallied this week on various data that suggested the economy is weakening and could be headed toward a recession. Yields move opposite to their price.

But claims are still on the low side compared to a 10-year average of about 305,000 before COVID, said Kevin Flanagan, head of fixed Income Strategy at WisdomTree. "Perhaps the employment setting based on claims was not as strong as initially thought, but it's certainly not weak," Flanagan said, adding that this week's weak data could quickly be forgotten after Friday's non-farm payrolls report. The bond rally pushed yields lower, doing a good part of market's desire to see the Federal Reserve cut interest rates, a drop that has shown up in conventional 30-year mortgage rates, Flanagan said. "Open market rates play a big role in other borrowing arrangements throughout the economy. So not everything is going to be based upon the exact Fed funds target," he said, referring to the Fed's current lending rate of 4.75%-5.05%.

The two-year Treasury yield, which typically moves in step with interest rate expectations, fell 0.3 basis points at 3.761%. The yield dropped from its open of 4.104% on Monday to swinging 25 basis points on Wednesday. The yield on benchmark 10-year notes slid 0.8 basis points to 3.279%, setting a fresh almost seven-month low. The yield on the 30-year Treasury bond was down 1.6 basis points to 3.541%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at -48.5 basis points.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.379%. The 10-year TIPS breakeven rate was last at 2.243%, indicating the market sees inflation averaging just above the Fed's 2.2% target over the next decade. The U.S. dollar 5-years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.424%. April 6 Thursday 10:56 a.m. New York / 1456 GMT Price Current Net Yield % Change (bps) Three-month bills 4.73 4.8511 0.000 Six-month bills 4.615 4.7884 -0.016 Two-year note 100-55/256 3.7605 -0.003 Three-year note 103 3.537 -0.009 Five-year note 101-80/256 3.3362 -0.008 Seven-year note 101-240/256 3.3114 -0.013 10-year note 101-216/256 3.2791 -0.008 20-year bond 103-32/256 3.652 -0.010 30-year bond 101-140/256 3.5405 -0.016
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 32.00 1.25
spread
U.S. 3-year dollar swap 16.25 0.75
spread
TU.S. 5-year dollar swap 6.25 0.25
spread
U.S. 10-year dollar swap -0.75 -0.50
spread
U.S. 30-year dollar swap -40.75 0.75
spread

(Reporting by Herbert Lash; Editing by Richard Chang)

Messaging: herb.lash.reuters.com@reuters.net))