Long-term Treasury yields hit new 2024 highs after drop in U.S. jobless claims

What happened

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  ended marginally higher at a one-week high of 4.355%, versus 4.352% on Wednesday.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  rose 3.9 basis points to 4.142%, from 4.103% on Wednesday. Thursday’s level is the highest since Dec. 12, according to 3 p.m. Eastern time figures from Dow Jones Market Data.

• The yield on the 30-year Treasury
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  jumped 6 basis points to 4.371%, from 4.311% on Wednesday. Thursday’s level is the highest since Dec. 4.

What drove markets

In data released on Thursday, initial jobless-benefit claims fell to under 200,000 in mid-January, the lowest level in 16 months. They dropped to 187,000 from a revised 203,000 in the prior week, a level that hasn’t been seen since September 2022.

The report follows Wednesday’s hotter-than-forecast retail-sales data. The strength of recent U.S. economic data has led to a concerted pushback by Federal Reserve officials against expectations for rate cuts starting as soon as March. On Thursday, Atlanta Fed President Raphael Bostic reiterated that he doesn’t expect policymakers to cut borrowing costs until the third quarter.

See also: Inflation is ‘far from dead’: Why one large asset manager doubts U.S. can hit 2%

Markets priced in a 97.4% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Jan. 31, according to the CME FedWatch Tool. The chance of a 25-basis-point rate cut by March was seen at 53.8%, down from 70.2% a week ago. However, fed-funds futures traders held on to the expectation of five to seven quarter-point cuts by December.

In other U.S. data, the Philadelphia Fed manufacturing gauge remained in negative territory for the fifth straight month, and housing starts fell to a 1.46 million annual pace in December. Treasury’s $18 billion auction of 10-year TIPS, or inflation-protected securities, was met with strong demand.

What analysts are saying

“The big question for markets at the moment is whether 2024 to date is just an understandable hangover to an exceptionally good end to 2023, or a marker for a more challenging year ahead,” said strategist Jim Reid and others at Deutsche Bank.

“We have corrected back a bit this week after a slew of relatively ‘hawkish’ central-bank speak (vs. market expectations) and yesterday’s surprisingly strong U.S. retail sales, but it still feels optimistic to assume such levels of cuts without economic troubles,” the Deutsche Bank team said in a note.