TREASURIES-U.S. yields fall after Fed Chair Powell's dovish comments, jobless claims

Gertrude Chavez-Dreyfuss
·4 min read

* Fed's Powell sees higher prices this year, but not inflation * Worse-than-expected jobless claims pressure yields * U.S. 5/30 yield curve flattens, with spread at 148 basis points * U.S. to sell $120 bln in 3-year, 10-year, 30-year debt next week (Adds new comment, updates prices) By Gertrude Chavez-Dreyfuss NEW YORK, April 8 (Reuters) - U.S. Treasury yields fell on Thursday, pressured by fresh dovish comments from Federal Reserve Chair Jerome Powell and weaker-than-expected initial jobless claims that highlighted the economy's bumpy recovery from the pandemic. At an International Monetary Fund event on Thursday, Powell said a surge in spending as the U.S. economy reopens, along with bottlenecks in supply, will likely push prices higher this year, but would not result in the kind of yearly price increases that would constitute inflation. He added that the unevenness in the U.S. recovery remains an issue. Powell's remarks followed equally cautious Fed minutes on the March policy meeting released on Wednesday, which reiterated that the U.S. central bank was in no rush to raise interest rates, and also weighed on Treasury yields. "The market has been expecting the Fed to waver a bit on its dovishness given that the acceleration in rates has been pretty quick. But the Fed hasn't wavered on that," said Ellis Phifer, managing director in fixed income research at Raymond James in Memphis, Tennessee. "Some Fed members have flinched a little bit, but overall the doves continue to be in control," he added. Thursday's higher-than-expected U.S. jobless claims also pushed down yields. Data showed that initial claims for state unemployment benefits totaled a seasonally adjusted 744,000 for the week ended April 3, compared with 728,000 in the prior week. Continued unemployment claims though fell to 3.73 million for the week of March 27. "Falling incidence of the coronavirus will lower initial claims," said Stan Shipley, fixed income strategist, at Evercore ISI in New York. He added that overall the data showed the "labor market is continuing to heal and should be neutral for Treasury yields." But with a massive $370 billion in Treasury supply looming over the next few weeks, Tom di Galoma, managing director at Seaport Global Holdings said it's only a matter of time before yields start shooting higher again. "In my view, 10-year yields could easily trade back to 1.75% next week," he added. Supply starts next week with the auction of $120 billion in 3-year, 10-year- and 30-year debt. Concerns about supply have steepened the yield curve for the last three sessions, but it flattened a bit on Thursday. The spread between 5-year notes and 30-year bonds narrowed to 148 basis points. In afternoon trading, the U.S. 10-year Treasury yield was down at 1.633% from 1.654% on Wednesday. U.S. 30-year yields fell to 2.323% from Wednesday's 2.336%. U.S. 5-year note yields, which typically reflect interest rate expectations, dropped for a fourth straight session to 0.84% from Wednesday's 0.858%. Recent declines in the 5-year yield suggested that investors do not believe the Fed will raise rates earlier than it has indicated. At the March meeting, the median forecast of Fed policymakers showed the central bank did not expect to raise interest rates until 2024. Despite the Fed's dovish comments in the policy meeting minutes and Powell's cautious stance, the eurodollar futures market, which tracks interest rate expectations, still has fully priced in a Fed hike by March 2023. April 8 Thursday 2:55PM New York / 1855 GMT Price Current Net Yield % Change (bps) Three-month bills 0.015 0.0152 0.000 Six-month bills 0.0325 0.033 0.003 Two-year note 99-244/256 0.1488 -0.004 Three-year note 99-204/256 0.3196 -0.002 Five-year note 99-144/256 0.84 -0.018 Seven-year note 99-176/256 1.297 -0.020 10-year note 95-100/256 1.6333 -0.021 20-year bond 94-100/256 2.226 -0.014 30-year bond 90-96/256 2.3238 -0.012 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap spread 12.75 -0.50 U.S. 3-year dollar swap spread 15.25 -0.75 U.S. 5-year dollar swap spread 11.75 -0.50 U.S. 10-year dollar swap 2.50 -0.50 spread U.S. 30-year dollar swap -23.75 -0.25 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Andrea Ricci)