US yields jump on better than expected jobs claims data

By Karen Brettell

NEW YORK (Reuters) -U.S. Treasury yields rose on Thursday after data showed jobless claims were lower than expected in the latest week, boosting confidence that the U.S. economy is less likely to face an imminent recession.

Muted demand for a 30-year bond auction added to the move higher in yields, coming a day after a weak sale of 10-year notes.

Initial claims for state unemployment benefits fell 17,000 to a seasonally adjusted 233,000 for the week ended Aug. 3, the largest drop in about 11 months. Economists polled by Reuters had forecast 240,000 claims for the latest week.

“This is a very positive print for markets overall. It reinforces the fact that labor market momentum is not slowing to the same extent that was represented by the payroll report, and it also reinforces the absence of very significant layoffs in the economy,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

Yields had tumbled after Friday’s employment report for July showed an unexpected increase in the unemployment rate, while jobs gains also came in below economists’ forecasts. Falling stock markets partly blamed by traders unwinding popular dollar/yen carry trades added to demand for safe haven U.S. debt.

But yields have rebounded as investors bet that the fears about the economy were overdone and on optimism that most of the unwind of the carry traders has been completed.

Thursday’s data may lead to further yield increases.

What the data “confirms is that we're seeing the unemployment rate rise due to new entrants into the labor force rather than a very large amount of layoffs,” Goldberg said. “I suspect that in the absence of data to the contrary, we'll continue to see the pricing for September rate cuts decline, and yields move higher across the curve.”

The odds of the Federal Reserve cutting interest rates by 50 basis points at its next policy meeting on Sept. 17-18 fell to 54%, from 69% on Wednesday, with a 25 basis point cut now seen as having a 46% probability, according to the CME Group's FedWatch Tool.

Yields hit session highs after the Treasury Department saw a poor reception for a $25 billion sale of 30-year bonds. The bonds sold at a high yield of 4.314%, more than two basis points above where they had traded before the auction. Demand was 2.31 times the amount of debt on offer.

"People are becoming very defensive, just based on the run-up that we've had" to higher prices and lower yields, said Tom di Galoma, head of fixed income trading at Curvature Securities.

At the same time, "there's been a tremendous amount of corporate supply this week - we had a heavy day yesterday and another heavy day today," he said. "Corporations are taking advantage of the lower funding that they're able to get just based on the rally that we've seen."

Thursday's auction followed a weak reception for a $42 billion sale of 10-year notes on Wednesday, where investors also appeared to balk at the lower yields following the recent bond rally.

The government saw solid demand for a $58 billion sale of three-year notes on Tuesday.

Yields on interest rate-sensitive two-year notes were last up 4.3 basis points at 4.0442%. They fell to 3.654% on Monday, the lowest since April 2023.

Benchmark 10-year note yields rose 3.4 basis points to 4.001%, after reaching 3.667% on Monday, the lowest since June 2023.

The yield curve between two- and 10-year Treasury notes flattened 3 basis points to minus 5 basis points. It reached 1.50 basis points on Monday, turning positive for the first time since July 2022.

The next major U.S. economic release will be consumer price inflation for July on Aug. 14. Comments by Fed Chair Jerome Powell at the Fed’s Jackson Hole Economic Policy Symposium on Aug. 22-24 may also provide new clues on the path of rate cuts.

(Reporting by Karen Brettell: editing by Jonathan Oatis)