10-year Treasury yield rises back above 1.60% as investors weigh data, $6 trillion budget proposal

U.S. Treasurys sold off and yields climbed on Thursday as economic reports on balance confirmed a healthy economic recovery from the COVID pandemic and as fixed-income analysts parsed the Biden administration’s plan to release a multitrillion-dollar fiscal year 2022 budget by Friday.

The data and news come ahead of a key measure for bond investors, the April personal consumption expenditure, due on Friday, and the May jobs report due the following Friday in a holiday-shortened Memorial Day week.

How Treasurys are performing
  • The 10-year Treasury note TMUBMUSD10Y, 1.609% was yielding 1.592%, up 2 basis points from Wednesday’s level at 3 p.m. Eastern Time.
  • The 30-year Treasury TMUBMUSD30Y, 2.289%, known as the long bond, was yielding 2.276%, up 1.8 basis points.
  • The 2-year Treasury note TMUBMUSD10Y, 1.609% rate was at 0.148%, versus 0.147% a day ago.

On Wednesday, the 10-year Treasury note snapped a four-day yield slide, while the 30-day extended its rate retreat to a fifth straight session, hanging around the lows level since May 6.

Fixed-income market drivers

After a steady two week buying stretch that had pushed yields down to around three-week lows, bonds yields are slowly edging back up, but trading within a relatively tight range.

U.S. government bond yields got a boost after a report on those seeking first-time unemployment benefits sank 38,000 to 406,000 in the week ended May 22, the government said Thursday, marking the fewest number of requests for compensation since the onset of the pandemic nearly 15 months ago.

Separately, orders for durable goods slipped 1.3% last month for the first time in a year because of a semiconductor shortage. And updated reading of gross domestic product in the year’s first three months, meanwhile, showed that the U.S. economy expanded at an annualized 6.4% pace, steady from the prior estimate released last month, according to the Commerce Department.

Market participants said that the report on the federal budget for the upcoming 2002 fiscal year, likely contributed the most to the jump in yields. The Wall Street Journal and New York Times reported that the Biden administration is laying out a $6 trillion budget plan, which would represent the highest sustained level of federal spending, including trillions in COVID aid, for the U.S. since World War II.

The Times said that the budget proposal includes plans for spending in education, transportation and addressing climate problems. The proposal means that more debt will likely be issued to help fund such an initiative, if passed, which would weigh on existing debt.

Informing recent trade is the insistence of members of the Federal Reserve that they will focus on achieving maximum employment before withdrawing support from the market, including a $120 billion-a-month asset-purchase program.

Still, market participants are starting to wager that the Fed may begin to signal more clearly that it is ready to scale back its market-supportive bond buying in August or September.

On Wednesday, Randal Quarles, the Fed’s vice chairman for supervision, said it would soon be time for Fed officials to begin debating slowing the central bank’s bond purchases, if the economy continues to improve at its current pace. Federal Reserve Vice Chair Richard Clarida also said on Tuesday that U.S. central bank officials may be able to begin discussing the appropriate timing of scaling back their bond-buying program at upcoming policy meetings,

Separately, a $62 billion auction of 7-year U.S. Treasury notes TMUBMUSD10Y, 1.609% went better than expected at 1.285%, with a stop through of 0.9 basis point. A stop-through indicates by how much the highest yield the Treasurys sold in the auction is below the highest yield expected when the auction began — the “when issued” level.

What are strategists saying?

“There’s a lot of debate on whether this inflation we see is going to be real,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities.

“And I think there’s anticipation that the Fed is talking tapering early so they are mentioning it in some of their press conferences,” he said.  

The Seaport Global Securities managing director said that a lot of the early morning selling in Treasurys, pushing yields higher was related to Europe.

“A lot of the selling in Treasurys that took place prior to the data release [in the U.S.], “ he said. 10-year British government debt TMBMKGB-10Y, 0.812% was yielding 0.808%, versus 0.754% on Wednesday. The 10-year German bond TMBMKDE-10Y, -0.168% was yielding -0.172% on Thursday, compared with -0.211%, in the prior session.

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