The 10-year Treasury's yield was last at 3.373%, while the two-year's yield last stood at 3.763%, after earlier in the day reaching their lowest points since April 6. Yields on 30-year bonds were last at 3.731%.
Long-dated yields slid throughout Thursday's session, as investors bet that the Federal Reserve will cut interest rates this year after raising them by 25 bps on Wednesday. The market has priced in more than 60% odds of a rate cut at the Fed's July meeting, sooner than Wednesday's pricing of cuts in September. A sharp drop in the shares of PacWest and other regional banks this week has added to unease about the economy's direction and market bets on sooner-than-expected rate cuts. "That's what is driving the market at the moment, which is more concerned about financial stability than what's going on with the data," said John Madziyire, head of Treasuries and inflation in the Vanguard Fixed Income Group. Yields initially spiked on Thursday morning following new labor data. Worker productivity declined 2.7% in the first quarter at the same time as unit labor costs surged 6.3%, a sign of rising consumer prices. But other Thursday data showed initial jobless claims rose 13,000 to a seasonally adjusted 242,000 for the week ending April 29, consistent with Tuesday data showing a decline in job openings. "Monetary policy is starting to slow the demand for labor, which is what it's supposed to do, and that should give the Fed some confidence," said Eric Winograd, senior U.S. economist at asset manager AllianceBernstein. "That evidence is a big part of the reason I think they are done raising rates and they're likely to stay on hold." The European Central Bank on Thursday slowed the pace of its own rate hiking to 25 bps, as expected.
Meanwhile, investors continue to dump bonds with shorter-term maturities, in the latest sign of nerves about the U.S. debt ceiling standoff. Treasury Secretary Janet Yellen said earlier this week that the government could run out of cash as soon as June 1, as Democrats and Republicans are still at an impasse. The yield on three-month Treasury bills rose overnight to 5.55%, its highest level since January 2001. It last stood at 5.24%. The yields on one-month and two-month T-bills also remained elevated from Wednesday's session. The Treasury Department on Thursday auctioned roughly $95 billion in short-term debt at record-high interest rates and great demand. It sold about $50 billion of four-week T-bills at 5.84% and $45 billion of eight-week bills at 5.4%, both record highs.
In money markets, the spread between the U.S. three-month Treasury bills and U.S. three-month overnight index swaps (OIS) rose to as much as 47 basis points on Thursday, the widest since mid-February 2012 when that gap was as high as 76 basis points. An OIS transaction, which reflects expectations of where interest rates are headed, involves exchanging an overnight rate such as the federal funds rate for a fixed one. The OIS spread to three-month T-bills reflects how the short-term bill is trading rich or cheap relative to future expectations of the Fed's rate path. One to three-month bills have cheapened on the curve as the market penciled in higher odds of a contentious debt ceiling standoff. The market on Friday will watch for further economic data, including the Labor Department's latest employment figures.
May 4 Thursday 3:49PM New York / 1949 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 5.1025 5.2402 -0.018
Six-month bills 4.87 5.0616 0.010
Two-year note 100-52/256 3.7677 -0.171
Three-year note 100-184/256 3.4905 -0.147
Five-year note 100-224/256 3.3081 -0.103
Seven-year note 101-16/256 3.3282 -0.071
10-year note 101-20/256 3.3693 -0.034
30-year bond 98-28/256 3.7304 0.015
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 25.75 -1.75
spread
U.S. 3-year dollar swap 16.00 -1.50
spread
U.S. 5-year dollar swap 10.25 -0.50
spread
U.S. 10-year dollar swap 2.50 -1.00
spread
U.S. 30-year dollar swap -40.75 -1.25
spread
(Reporting by Matt Tracy; Additional reporting by Gertrude
Chavez-Dreyfuss; Editing by Jonathan Oatis, Kirsten Donovan and
Deepa Babington)
