TREASURIES-Longer-dated U.S. yields fall after run higher, claims data

BY Reuters | TREASURY | 12/29/22 03:12 PM EST

(Adds auction results, updates prices)

By Chuck Mikolajczak

NEW YORK, Dec 29 (Reuters) - The yield on the benchmark U.S. 10-year Treasury note fell on Thursday following three straight sessions of gains, as labor market data showed new claims for unemployment benefits increased last week.

The Labor Department said weekly initial jobless claims rose by 9,000 to a seasonally adjusted 225,000, in-line with expectations, while continuing claims rose by 41,000 to 1.71 million, the highest since February.

"The rise in continuing claims suggests those who have filed for unemployment are having increasing difficulty in finding new jobs and that is before we start to see the almost inevitable increases in unemployment that are tied to the housing sector," said Michael Green, portfolio manager and chief strategist at Simplify Asset Management in New York. Green added that after a year of hearing about the labor market's strength, the data is now showing some signs of weakness.

The yield on 10-year Treasury notes was down 4.7 basis points to 3.839%.

After hitting a near-three-month low on Dec. 7, the 10-year yield has steadily climbed as hopes grew the Fed would signal that an end to its rate hike cycle was on the horizon.

It had its biggest weekly rise in 8-1/2 months last week on the heels of policy announcements from the U.S. central bank, the Bank of England and the European Central Bank.

Adding to pressure in recent days was the reversal by China of its "zero-COVID" policy, which some analysts believe will increase inflationary pressures in the short-term due to increased consumer demand.

The yield on the 30-year Treasury bond was down 5.2 basis points to 3.925%.

U.S. central bank forecasts expect fed funds rates to climb above 5% next year, while Fed Chair Jay Powell and other Fed officials have emphasized there may be a need to keep rates higher for longer to completely eliminate high inflation.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at negative 53.7 basis points.

Analysts have cautioned, however, that it is difficult to draw conclusions from market direction this week given the limited trading activity around the holidays.

There was average demand for a $35 billion auction of seven-year notes, according to market participants, with demand for the debt at 2.45 the notes on sale, a rebound from auctions in the prior two months.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 1.3 basis points at 4.372%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.374%, after closing at 2.361% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.28%, indicating the market sees inflation averaging 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Alison Williams and Josie Kao)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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