Long-dated U.S. Treasury note yields fell slightly Thursday as investors anticipated the Federal Reserve's next policy move after higher-than-expected unemployment claims last week.
The two-year yields fell to 4.485 percent after reaching 4.514 percent the previous day, its highest level in one month. Meanwhile, the 10-year Treasury note yields went down to 3.667 percent after hitting its one-month high of 3.692 percent. Other longer-term bond yields also posted losses.
Analysts noted that the yield curve between the two notes was inverted by minus 88 basis points during the day — the most inverted since December 13 last year — indicating concerns about a possible recession. The yield curve eventually retraced back to minus 82 basis points.
The Treasury Department then reacted to the yield fall by holding an auction for the 30-year Treasury notes in the afternoon. The bonds then rose to 3.686 percent, around three basis points over the trading level before the auction.
This week, the demand for government bonds has been mixed. For instance, the 10-year notes saw a $35 billion sale on Wednesday, the highest since January 6. On the other hand, the three-year notes only posted a $40 billion sale on Tuesday, the lowest in the past few weeks.
The U.S. Department of Labor reported that jobless claims jumped by 13,000 to 196,000 last week, higher than analyst forecasts. Investors considered the data a sign of ongoing disinflation.
Vanguard senior portfolio manager Arvind Narayanan said the continuing unemployment claims, which rose by 38,000 to 1.688 million, showed that pressures are building in the labor market.
“I think the continuation of jobless claims, particularly this morning, indicates that you’re starting to see pressures building up in the labor market.”
Arvind Narayanan, Senior Portfolio Manager at Vanguard
"We expect inflation to continue its downtrend, although none of this is going to be in a straight line," Narayanan added. "But the directionality is a slowdown, and we think fundamentals are going to matter."
This Tuesday, Fed chairman Jerome Powell appeared for the first time since the rate-setting meeting and strong monthly job report last week. Powell said the Fed would likely increase interest rates further in the coming months. Analysts said the chair's remarks were less hawkish than anticipated.
Richmond Fed president Thomas Barkin also said Thursday that the Fed's monetary policy had started to slow the U.S. economy, enabling the central bank to take further action "more deliberately."
Analysts now expect the central bank to hike the interest rates two more times, a 25-basis-points increase each, moving the federal funds rate to a target range of 5.00 to 5.25 percent.
Next week, the government will publish January's consumer price, a major data point in the Fed's decision-making process. Analysts predict headline inflation will increase by 0.5 percent while core prices will rise by 0.4 percent.
Wall Street closes lower
All three major indexes on Wall Street closed lower Tuesday after the Treasury's auction midday. The indexes initially opened the trading session higher.
Dow Jones concluded the session at 33,699.88, falling 0.73 percent or 249.13 points. S&P 500 closed at 4,081.50, declining by 0.88 percent or 36.36 points. Meanwhile, NASDAQ lost 1.02 percent or 120.94 points to close the trading day at 11,789.58.
Google parent company Alphabet extended its loss on the S&P 500 and Nasdaq indexes, falling by 5.2179 percent. Alphabet shares went down after its new chatbot Bard shared inaccurate information in a promotional video. Analysts said investors were concerned that the tech company lost ground in the AI sector from rival Microsoft.
Despite that, some companies reported gains during the closing. Disney shares rose by 0.36 percent, the highest since August, after beating earnings forecast and announcing layoffs. Pepsi also gained 0.67 percent after reporting higher-than-expected revenue.