US Treasury debt prices stabilised on Thursday after the worst selloff in four months, as investors considered whether the jump in yields now reflects an economic recovery that was gathering momentum.
Shorter-dated yields dipped, trimming their recent rise, as investors also mulled the idea that despite the somewhat rosier outlook, the Federal Reserve was still likely to hold interest rates near zero at least through this year and would probably not launch any new stimulus in the next couple of months.
Some investors argued the selling on Tuesday and Wednesday, which pushed yields to the highest level since October, had been overdone and that the outlook still holds plenty of uncertainty despite some promising economic data. Others said higher yields were here to stay because investors believed a 2 percent yield on the benchmark 10-year note was too low given US job growth, the recent bailout deal on Greece, and some reassuring stress test results for a majority of big US banks.
"We think the range trade continues in Treasuries but that the range has shifted higher," said Bret Barker, portfolio manager at TCW in Los Angeles. "The rise reflects better data finally acknowledged by the Fed and Europe relief trade. The back-up in rates is also not consistent with the Fed's outlook. They are still very dovish, and we think they will remain on hold, and this should cap the rise in rates to a certain extent."
A fall in new US claims for unemployment benefits last weeks back to a four-year low hit in February, suggesting a strengthened labour market, supported investors' recent preference for riskier assets at the expense of safe-haven US debt. But the sharp run-up in yields over the last two trading sessions drew some buyers on the short end of the market, with two-year notes trading 1/32 higher in price to yield 0.38 percent, down from 0.4 percent late Wednesday.
Yields on two-year notes, which touched a seven-month high in overnight trade, were on track for the biggest single-day dip since late October. That steepened the Treasury curve, with the spread between yields on two-year notes and 10-year notes moving to the widest since late October.
Benchmark 10-year Treasury notes slipped 1/10 in price to yield 2.28 percent. In overnight trade, the yields touched 2.35 percent, the highest since late October. "More signs of sustainable growth have led to higher yields, but we also have the counterforce of the Fed's Operation Twist," Stith said, referring to the Federal Reserve's purchases of longer-dated Treasuries using proceeds from the sale of shorter-dated maturities. On Thursday, the Fed bought $4.027 billion in Treasuries with maturities ranging from May 2018 through November 2019.