U.S. Treasury yields were mostly higher on Thursday after data showing job growth remains solid, which strengthened the argument of central bank officials in recent days that changes towards lower interest rates will not be rushed.
Yields, which move inversely to prices, had declined overnight partly because of a flight to safety amid fears of an escalation of the conflict in the Middle East after Pakistan fired a retaliatory strike at Iran.
But the bearish bias that characterised the bond market this week took hold again after the Labor Department said on Thursday that the number of Americans filing new claims for unemployment benefits fell last week to the lowest level since late 2022, suggesting job growth likely remained solid in January.
Benchmark 10-year yields were last up two basis points from Wednesday at 4.125%, and yields were also slightly higher for other medium to long-term maturities. Two-year yields were roughly unchanged after jumping on Wednesday.
The jobs data followed a series of economic indicators in recent days pointing to resilience in the economy despite interest rates remaining at their highest level in decades, suggesting the Federal Reserve may not move towards less restrictive monetary conditions as fast as the market expected.
“This certainly supports the view that maybe (rate cuts) will not be in March and maybe it will be in June,” said Thomas Hayes, chairman and managing member of New York-based Great Hill Capital. “But in the grand scheme of things inflation is dropping like a rock and they will be cutting this year. The question is how many.”
Short-term rate futures markets on Thursday were still signaling consensus around a first interest rate cut in March, even though that had a 56% probability, down from 70% last week. Meanwhile, the probability of a first rate cut in May was at 45%, up from 30% last week, according to CME Group data.
On the supply side, later on Thursday the Treasury department will auction $18 billion 10-year Treasury Inflation-Protected Securities (TIPS), after a 20-year Treasury bond auction saw soft demand on Wednesday.
Rates analysts at BMO Capital Markets said in a note that concerns on potential spikes in oil prices caused by geopolitical risks in the Middle East could support demand.
“There may be a stronger tactically bullish backdrop for TIPS given there remains no shortage of uncertainty around the outlook for crude and shipping costs as the Red Sea conflict continues,” they said.
