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Bond Report: Treasury curve flattens to narrowest in 11 months or more as investors monitor omicron’s spread

Most Treasury yields advanced Thursday, with the two-year yield posting its biggest one-day gain since Nov. 22, as investors assessed the U.S.’s second confirmed case of the omicron variant of the coronavirus and the likely impact on the economy.

Long-end rates failed to keep up with the rise in shorter-end yields, causing the widely followed spread between 2- and 10-year rates to shrink below 83 basis points, the narrowest since Jan. 4, according to Tradeweb data. Meanwhile, the gap between 5- and 30-year yields tightened to a level not seen since March 9, 2020.

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.443%

rose 1.4 basis points to 1.447%, up from 1.433% at 3 p.m. Eastern on Wednesday. Yields and debt prices move in opposite directions.

The 2-year Treasury yield
TMUBMUSD02Y,
0.626%

rose 5.4 basis points to 0.617% from 0.563% Wednesday afternoon. It was the yield’s largest one-day gain in more than a week, based on 3 p.m. levels, according to Dow Jones Market Data.

The 30-year Treasury bond yield
TMUBMUSD30Y,
1.757%

dropped 1 basis point to 1.768% from 1.778% on Wednesday. The yield has fallen for three consecutive trading days.

What’s driving the market?

Investors may be taking solace from a Minnesota Department of Health report that the person is showing just mild symptoms, as is the California resident involved in the U.S.’s first confirmed case.

Meanwhile, data released on Thursday showed that initial jobless claims climbed 28,000 to 222,000 during Thanksgiving week, though unusually big ups and downs in the past two weeks seem tied in large part to the holiday timing.

Financial markets have been on a roller-coaster ride in recent sessions as investors attempted to come to grips with the prospect of a faster-than-expected tapering of bond purchases by the Federal Reserve, along with the implications of the omicron variant.

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U.S. stocks traded sharply higher Thursday afternoon, following Wednesday’s wild, 1,000-point swing by Dow industrials as the U.S.’s first confirmed omicron case ushered in an unsettling phase of volatility.

Meanwhile, the widely watched spread between 2- and 10-year Treasury yields shrank below 83 basis points on Thursday to the narrowest level since Jan. 4, based on 3 p.m. data from Tradeweb. The spread has narrowed by almost 20 basis points since Monday, pointing to worries about the longer-term economic outlook.

Investors have also stayed focused on this week’s comments to lawmakers by Fed Chairman Jerome Powell, who said he said that he doesn’t think the central bank’s plan to pull back on asset purchases should disrupt financial markets. Powell has also surprised market participants, by opening the door to speeding the tapering process when policy makers meet later this month.

During an appearance on Thursday, Federal Reserve Bank of San Francisco President Mary Daly said the central bank’s new “dot-plot,” to be released in less than two weeks, could show more than one quarter-point hike in the central bank’s benchmark policy rate in 2022.

Friday’s data releases will have the nonfarm payrolls for November as the tentpole data event.

What are analysts saying?

“Higher daily volatility has scrambled technical signals for benchmark interest rates,” Jim Vogel, executive vice president at FHN Financial, wrote in a note. “The effective range for 10s heading into payrolls is 1.40-1.55%; the potential for moves in that band is 5bp in any given hour.” Meanwhile, “the range for the 5-yr is also 15bp, from 1.13%-1.28%.”

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