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Bond Report: Two-year rate carves out fresh 52-week high as investors turn to Federal Reserve’s next meeting

Treasury yields climbed Thursday, with the two-year rate carving out a 52-week high, as investors looked beyond mixed U.S. data and toward next week’s Federal Reserve policy meeting.

U.S. data released earlier in the day showed initial jobless claims surging last week to a three-month high and the Philadelphia Fed’s manufacturing index rebounding in January.

What are yields doing?

The 2-year Treasury note yield TMUBMUSD02Y, 1.031% advanced 2.7 basis points to 1.049% versus 1.022% on Wednesday afternoon. The rate has been hitting a series of 52-week highs and incrementally adding to its climb toward the highest level since February of 2020, based on yields at 3 p.m. Eastern Time, according to Dow Jones Market Data.
The 10-year Treasury note yield BX:TMUBMUSD10Y rose less than one basis point to 1.833%, compared with 1.826% at 3 p.m. Eastern on Wednesday.
The yield on the 30-year Treasury bond TMUBMUSD30Y, 2.120% rose less than 1 basis point to 2.140%, compared with 2.137% on Wednesday.
The 10- and 30-year yields are each up three of the past four trading days

What’s driving the market?

The aggressive selloff that’s driven Treasury yields substantially higher in the new year has taken a bit of a breather Wednesday and Thursday, as investors turn their attention to the Federal Open Market Committee’s Jan. 25-26 meeting.

At next week’s gathering, the Fed is expected to lay the groundwork for delivering a rate increase in March, with some investors even penciling in the prospect of a half percentage point rise in the fed-funds rate target rather than a quarter-point increase.

Read: Fed to use coming policy meeting to get ducks in a row for March liftoff

U.S. data released on Thursday showed that initial jobless claims jumped by 55,000 last week to a three-month high of 286,000, in a sign the omicron outbreak spurred more layoffs. Economists polled by The Wall Street Journal had forecast initial jobless claims to total a seasonally adjusted 225,000 in the seven days that ended Jan. 15.

Meanwhile, the Philadelphia Fed’s manufacturing index rebounded in January, rising by 8 points to 23.2—showing businesses are still growing despite omicron and persistent labor and supply shortages. And existing-home sales declined 4.6% between November and December amid a shortage of listings—hitting a seasonally adjusted, annual rate of 6.18 million that missed economists’ projections.

Treasury’s $16 billion TIPS, or Treasury inflation-protected securities, auction “required a modest concession” and, since the result of the sale, “the broader market has cheapened slightly,” BMO Capital Markets strategist Ben Jeffery said in a note

Elsewhere on Thursday, China cut its benchmark lending rates. The move was widely expected after the central bank lowered the borrowing costs on medium-term loans earlier this week, as it attempts to support a slowing economy.

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What are analysts saying?

“Choppy price action at the yield peaks (recall 10-year rates made it to 1.90%) isn’t surprising as the dearth of top tier economic data ahead of next week’s Fed meeting has left investors to ponder the sustainability of the repricing without fundamental inputs or official commentary to refine expectations” BMO’s Jeffery and strategist Ian Lyngen wrote in a note.

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