The bond yields experienced an early rise on Thursday as traders anxiously awaited fresh comments from Fed Chair Jerome Powell, an update on the jobs market, and another U.S. government bond auction.

Yield Movement

The yield on the 2-year Treasury (BX:TMUBMUSD02Y) witnessed a 1.7 basis point increase, reaching 4.945%. It's important to note that yields move in the opposite direction to prices.

Similarly, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) saw a rise of 2.4 basis points, settling at 4.530%.

Moreover, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) climbed by 4.6 basis points, reaching 4.663%.

Market Drivers

Benchmark bond yields have generally been higher lately but still remain slightly above the six-week lows. The recent decline in yields can be attributed to signals indicating a cooling jobs market. This has led to the perception that the Federal Reserve will stop raising interest rates. Additionally, investors have displayed confidence in their ability to absorb the government's paper sales.

However, there are three significant events on Thursday that could potentially challenge this narrative.

  1. First, the weekly initial jobless claims report is set to be released at 8:30 a.m. Eastern Time. Bond bulls are hopeful that the projected increase from 217,000 to 220,000 indicates a weaker labor market. This would help control wage inflation.

  2. At 1 p.m., the Treasury will conduct a $24 billion auction for 30-year bonds. Investors will closely follow this event and hope for a positive market response similar to the $40 billion 10-year bond auction held the previous day.

Fed Chair Jerome Powell's Comments on Global Monetary Policy Challenges

At 2 p.m., Fed Chair Jerome Powell is set to make comments at an International Monetary Fund panel regarding global monetary policy challenges. The main question lingering in the market is whether he will counter the recent easing of monetary conditions.

According to senior analyst Ipek Ozkardeskaya from Swissquote Bank, U.S. bond traders are becoming overly optimistic, which could pose a serious problem for the Federal Reserve's efforts. Ozkardeskaya believes that Fed officials should be cautious about containing the excessive optimism from the bond markets, as it may inadvertently loosen financial conditions in the U.S. before the Fed achieves its 2% inflation goal.

Austan Gollsbee, Powell's colleague at the Chicago Fed, shares similar concerns. In an interview with the Wall Street Journal, Gollsbee emphasized the importance of the central bank not allowing longer-term yields to surpass desired levels. He stated that long rates have the potential to significantly impact the economy compared to short rates.

Looking ahead to potential catalysts on Thursday, the market is currently pricing in a 91% probability that the Fed will maintain interest rates at their current range of 5.25% to 5.50% after the upcoming meeting on December 13th. These calculations are based on the CME FedWatch tool.

Furthermore, there is an 18% chance of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent meeting at the end of January. The market does not anticipate the Fed to decrease its Fed funds rate target to approximately 5% until July 2024, as indicated by the 30-day Fed Funds futures.

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