Treasury yields firmer as traders eye looming jobs data

Investor attention is turning to a batch of jobs data over the next few sessions that may help determine whether the Federal Reserve stands pat or raises interest rates in less than two weeks time.

The ADP private-sector employment report is due 8:15 a.m. and the weekly initial jobless claims data at 8:30 a.m. on Thursday, and the nonfarm payrolls report on Friday.

The chances of a 25 basis point rate hike by the Fed to a range of 5.25% to 5.5% on June 14 has fallen from 67% on Wednesday to 32% on Thursday, after Philadelphia Fed President Patrick Harker told MarketWatch that the central bank should take a break from raising borrowing costs.

Indeed, markets now are pricing in a 68% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its June meeting, according to the CME FedWatch tool.

Other data due Thursday include the S&P U.S. manufacturing PMI for May at 9:45 a.m.; the May ISM manufacturing report at 10 a.m.; and April construction spending at 10 a.m.. All times Eastern.

Meanwhile, data released Thursday showed eurozone inflation up 6.1% in the year to May, down from 7% in April. That was the slowest pace of price growth in more than a year and lower than expectations of 6.3%, but still 2-year German bond yields
TMBMKDE-10Y,
2.292%
rose 5.2 basis points to 2.765% after ECB President Christine Lagarde said inflation remained too high.

What are analysts saying

“U.S. Treasury yields dropped across the yield curve yesterday with the yield curve bull flattening. Most of the move might be attributed to the month-end bond index rebalancing. However, lower than expected inflation in Germany and Fed’s members speeches contributed to decrease rate hike bets for June contributing to the bond rally” said strategist at Saxo Bank in a morning note Thursday.

“We still believe that the risk of a liquidity squeeze remains elevated as the Treasury must issue around $1 trillion to replenish its reserves. Approximately $500 billion will need to be raised in just four weeks. That would be the biggest quarterly issuance outside of a crisis such as the pandemic and the global financial crisis.”

“Thus, we expect the bear flattening of the yield curve to resume, before rates start to drop for good. Our focus is on today’s ISM survey and Friday’s non-farm payrolls. In the short term, it may be possible to see the two-year yields break above resistance at 4.63% and soar to 4.8%. Ten-year yields will rise at a slower pace but might test resistance at 4.91%. Thirty-year yields are likely to soar to 4.0%,” Saxo concluded.