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Bond Report: Treasury yields rise to highest level in weeks, post weekly gains, as U.S. inflation climbs and initial jobless claims come in unchanged

U.S. Treasury yields rose to the highest level in weeks on Thursday, while also posting gains for the shortened holiday week, after a gauge of U.S. inflation jumped in November and weekly jobless benefit claims came in unchanged at 205,000.

Trading in the bond market ended an hour earlier Thursday and will remain closed on Friday in observance of the Christmas holiday.

What are yields doing?

The 10-year Treasury note yield TMUBMUSD10Y, 1.495% rose 3.5 basis points to 1.492%, up from 1.457% at 3 p.m. Eastern on Wednesday. That’s the highest level since Dec. 8, based on 3 p.m. levels, according to Dow Jones Market Data. The yield climbed 9.1 basis points this week.
The 30-year Treasury bond rate TMUBMUSD30Y, 1.908% climbed 5 basis points to 1.906%, up from 1.856% a day ago. That’s the highest since Nov. 24, and the biggest one-day gain since Dec. 8. The yield is up 9 basis points this week.
The 2-year Treasury note yield TMUBMUSD02Y, 0.691% rose 2.1 basis points to 0.686%, compared with 0.665% on Wednesday afternoon. That’s the highest since Dec. 7, and the second-highest level of the year. The yield gained 4.6 basis points on the week.

What’s driving the market?

Data released on Thursday showed that the Federal Reserve’s preferred inflation gauge, the 12-month increase in the PCE index, jumped to 5.7% in November from 5% in the prior month. That’s the highest rate since 1982.

Meanwhile, initial jobless benefit claims for the week ended Dec. 18 were unchanged at 205,000 — below the pre-pandemic average and economists’ estimate for 206,000. Jobless claims continued to reflect a tight labor market and robust demand for workers as the economy recovers during the pandemic.

Consumer spending rose 0.6% in November after a 1.4% gain in the prior month, the U.S. government said Thursday.  That’s in line with forecasts of economists surveyed by The Wall Street Journal. And durable goods increased 2.5% in November, beating economists’ forecast for a 1.5% gain.

In other data released on Thursday, new-home sales jumped 12.4% to a 744,000 annual rate in November and the final University of Michigan consumer sentiment index edged up to 70.6 in December from a 70.4 preliminary reading.

U.S. stock indexes were heading for a third straight gain on Thursday after a series of new studies suggested the omicron variant may be less severe than its predecessors. Preliminary data from a trio of studies also showed that omicron is less likely to lead to hospitalization, suggesting the variant is comparatively less dangerous than the earlier delta variant. In other positive news, the Food and Drug Administration authorized a COVID-19 antiviral pill from Pfizer Inc. PFE on Wednesday.

However, the rapid spread of the new variant means that hospitals may still be overwhelmed. Governments continue to take measures to slow the spread, with Chinese authorities locking down a city of 13 million people Thursday and mask mandates are being enforced in many countries, along with some curfews on entertainment venues ahead of the year-end holidays.

The World Health Organization is warning that without COVID vaccinations for poorer countries, the world will continue to struggle with the pandemic despite booster vaccines in rich countries.

What are strategists saying?

“The year ahead will be defined by a Fed attempting to stem higher inflation via normalizing monetary policy at a time when the impact of the pandemic continues to weigh on the macro outlook,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “We expect this will leave the most bearish tone in Treasuries in the belly of the curve, while the 10- and 30-year sectors continue to exhibit range trading behavior.”
“This will translate to 2022’s primary theme being that of a flatter curve as the front-end reprices to a more hawkish Fed, while declining inflation expectations will translate to an outperforming long-end,” they wrote in a note.

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