Bond Report: Treasury yields mostly lower as Bank of England holds off on rate hike, taking focus off of Fed’s dovish taper

What are yields doing?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.525%
edged down to 1.553%, compared with 1.577% at 3 p.m. Eastern on Wednesday.

The 2-year Treasury note yield
TMUBMUSD02Y,
0.402%
fell to 0.422% from 0.476% Wednesday afternoon.

The 30-year Treasury bond yield
TMUBMUSD30Y,
1.974%
was unchanged at 1.984% since late Wednesday.

What’s driving the market?

Overseas, the Bank of England opted to hold off on a widely expected interest-rate hike on Thursday that futures markets had fully priced in. Norway’s central bank also left its key interest rate unchanged, at zero, during Thursday’s monetary policy meeting, as expected, but said rate increases could begin much sooner than it previously projected.

The moves forced traders to reconsider their expectations for how much central banks are willing to raise rates in the face of elevated inflation pressures around the world and a global economic growth slowdown.

At the conclusion of its Wednesday policy meeting, the Fed delivered what many analysts regard as a “dovish” taper. Policy makers said they would begin scaling back on monthly asset purchases later in November at a pace that would wind down the bond-buying program by the middle of next year. However, Fed Chairman Jerome Powell said policy makers would be patient about raising rates, although they would stand ready to act as needed in the face of higher inflation.

See: Fed still thinks surging U.S. inflation won’t last, but it’s now hedging its bets

The Fed statement and Powell’s remarks at his press conference underscored the expectation that inflation pressures are expected to prove “transitory,” fading as supply-side bottlenecks resolve themselves, though Powell did say risks to the inflation outlook were skewed to the upside.

Some investors say that a curve flattening, or shrinking in the differential between yields across maturities, is likely to continue on worries about the growth outlook.

Meanwhile, the stock market continued to have a calm reaction to the Fed’s announcement, with the S&P 500
SPX,
+0.34%,
Nasdaq Composite
COMP,
+0.79%
and the small-cap Russell 2000
COMP,
+0.79%
edging higher on Thursday. The Dow industrials
DJIA,
-0.21%
were little changed.

See: Why the Fed’s long-awaited taper announcement isn’t rattling the stock market

Data released Thursday in the U.S. showed that the number of Americans who applied for unemployment benefits in late October fell to yet another pandemic low, reflecting an urgent need by companies to hold on to current employees and find new ones. New jobless benefit claims dropped by 14,000 to 269,000 for the seven days ended Oct. 30.

Meanwhile, labor costs surged in the third quarter due to higher wages and production snafus, as U.S. productivity sank at a 5% annual pace. And the U.S. trade deficit widened to a new record high.

Friday brings the October jobs report from the Labor Department, with economists looking for payrolls to rise by 450,000 and the unemployment rate ticking down to 4.7% from 4.8%.

What are analysts saying?

“Traders who positioned for escalating rates in both the euro zone and England are now pulling back, and when something that fast happens in smaller government markets, some of that spills over into Treasuries,” said Jim Vogel of FHN Financial. “They are taking the Fed out of the top tier of headlines.”

The fact that the shift to Fed tapering “took place with 10-year yields failing to move above 1.60% reinforces the notion that the onus will be the performance of the real economy and the ultimate impact on Fed policy to drive the next durable trend in Treasuries,” BMO Capital Markets strategist Ben Jeffery wrote in a note.