10-year Treasury yield hits 2.78%, 30-year above 3% on signs of accelerating economy

The benchmark 10-year Treasury yield renewed its sharp climb on Thursday.

The closely followed rate had initially pared an early move after fresh wages data threw doubt on predictions of stronger inflation in the upcoming months. But the net effect of the day’s economic data, and expectations for a strong reading on hiring in the monthly labor report due out Friday, renewed the charge higher for yields.

How are Treasurys performing?

The yield on the 10-year Treasury note TMUBMUSD10Y, +0.18%  traded as high as 2.783%, tacking on a remarkable 7 basis points, in New York, according to Tradeweb data. The yield move furthered the 10-year’s advance to its highest level since April 2014.

The 2-year note yield TMUBMUSD02Y, +0.78% the most sensitive to changes to monetary policy, was up about a basis point at 2.161%, while the 30-year bond yieldTMUBMUSD30Y, +0.21% cleared 3% for the first time since last May, up 6 basis points, to 3.002%

Bond prices move in the opposite direction to yields.

What is driving the markets?

The Fed signaled it is on track to raise rates at its next meeting in March after policy makers decided unanimously to leave the fed-funds rate unchanged in a range of 1.25% to 1.50%, as expected. The policy statement was read as relatively hawkish, asserting that inflation would pick up in coming months.

But hourly compensation data, adjusting for inflation, fell 1.8% in the fourth-quarter. Falling inflation is bullish for bonds because rising prices erode their fixed payments. And yield expectations can lead investors to dump existing bonds in anticipation of higher yielding bonds in the future.

Analysts were nonetheless bullish that a tight labor market would unleash stronger wage gains and thus inflationary pressures.

Federal-fund futures are currently pricing in Wall Street expectations for a 83% probability for a quarter-percentage point rate increase during the March 20-21 meeting, according to CME Group data.

Most estimates say that, for the first quarter, U.S. economic growth is in the region of about 2.6%. But the Atlanta Fed’s GDPNow model, updated Thursday, says that first-quarter growth may be an eye-popping 5.4%.

What are strategists saying?

UBS in a Thursday research note lifted its forecast for 10-year yields to reach 2.9% by the end of 2018, up from a previous prediction of 2.7%. For 2019, the Swiss bank raised the forecast to 3% from 2.85% previously.

“The popular market narrative that “there is no wage growth” and “there is no inflation” will have to shift in 2018. Average hourly earnings have plenty of room to move higher given the labor market’s strength and the low unemployment rate,” said Jeffrey Cleveland, chief economist for Payden & Rygel, in a note.

What data are ahead?
  • A reading on weekly jobless claims fell by 1,000 to 230,000 for the 7-day period ending Jan. 27. Economists polled by MarketWatch had forecast 240,000 claims.
  • Fourth-quarter productivity fell 0.1%, below the 0.2% growth expected by economists.
  • ISM’s manufacturing index for January edged lower to 59.1%, from 59.3% in December. Nonetheless, the data represented another strong reading for the gauge as factories hum along with the aid of a weak dollar and the recent tax cuts.
What other assets are in focus?

The 10-year German bond yield, known as the bund TMBMKDE-10Y, +0.00% was at 0.640%, compared with 0.634% in the prior session, according to Tradeweb data. Comparable Japanese bonds TMBMKJP-10Y, -7.29% known as JGBs, are bearing a yield of 0.094%, versus 0.086% on Wednesday.