The sharp selloff in Treasuries abated on Thursday, with US bonds rallying alongside European peers, after three straight days of declines.
While an unexpected drop in initial jobless claims curbed the day’s gains, yields remained lower across the curve, led by five- to 10-year yields, down close to three basis points on the day, about half as much as before.
Expectations for Federal Reserve interest-rate cuts also remained lower on the day, mirroring the move overseas, where a mixed bag of European PMI data saw wagers on a half-point reduction by the European Central Bank increase.
Treasuries have been under pressure in recent days, with worries stemming from signs of a resilient US economy and rising speculation that former President Donald Trump will win the Nov. 5 presidential election and implement deficit-boosting policies. Yields on the benchmark 10-year rate rose to 4.26% on Wednesday, the highest level since July.
“This seems more like a technical relief rally following the recent strong selloff,” said Elias Haddad, a senior market strategist at Brown Brothers Harriman. “The fundamental backdrop, reflected by solid US economic activity, continues to favor higher Treasury yields.”
On Wednesday, the Fed’s beige book indicated that economic activity was flat in most parts of the US since early September, while more than half of districts reported slight or modest growth. It also highlighted angst around the upcoming election, with more than 15 references to the event as a source of uncertainty.
“The report contained nothing to dissuade the Fed from cutting rates in November but also did not signal any urgency to go beyond the 25 basis points that the market is currently still anticipating,” said Michiel Tukker, a rates strategist at ING.
Money markets are currently pricing about an 85% chance the Fed will cut rates by a quarter-point next month, and around 135 basis points of easing by the end of 2025.
Speculation that Trump will win the election has also contributed to push up yields, as he’s seen stoking growth and inflation through an agenda of tax cuts and steeper tariffs. Still, Standard Chartered finds the increase in Trump’s elections odds has had more of an influence on the dollar’s recent gains.
Outstanding positions in US 10-year Treasury futures have fallen on most days since yields began rising at the start of the month, and are now at the lowest in three months. This suggests the recent selloff has been driven by investors liquidating their bond holdings, which leaves markets prone to a sharp rebound if the selling abates.
Focus now turns to US data due later in the day, such as October PMIs, as well as comments from Federal Reserve Bank of Cleveland President Beth Hammack.
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