Investors sought the safety of bonds for a second day as jitters over a rout in bank stocks hit risk sentiment and traders speculated that rate-hike bets had gone too far too fast.
(Bloomberg) — Investors sought the safety of bonds for a second day as jitters over a rout in bank stocks hit risk sentiment and traders speculated that rate-hike bets had gone too far too fast.
Two-year Treasury yields dropped 12 basis points to 4.75%. The rate has tumbled 32 basis points since Wednesday’s close to head for its biggest two-day slide since June. Australian and New Zealand bonds also rallied on Friday, with three-year yields in Australia down 12 basis points.
US short-dated bonds started surging on Thursday as hints of labor-market weakness and a flight to safety set off by a rout in financial company shares sent investors piling back in to the same government securities they spent much of the first half of this week selling. Yields on two-year US notes soared above 5% for the first time since 2007 after Fed Chair Jerome Powell this week indicated the central bank could decide to raise its benchmark rate by half a point, re-accelerating from the quarter-point move it made Feb. 1.
Rates traders scaled back bets on a half-point hike this month to about an even chance after data showed that the number of Americans filing for unemployment benefits unexpectedly swelled to the highest this year. Swaps contracts signaled earlier on Thursday about a 75% chance the Fed would increase its benchmark rate to between 5% and 5.25%, from a 4.5%-4.75% range now.
“The jump in jobless claims was just what bond bulls were looking for because it’s got a long track record of being the best leading indicator for the labor market,” said Kellie Wood, a fixed-income money manager at Schroders Plc in Sydney. Demand for government bonds is also strong after yields reached multi-decade highs, she said. “I would much rather be buying high quality assets at 5-5.5% than equities at about 6%,” she said, referring to bond yields versus the earnings yields on stocks.
Another report Thursday from Challenger, Gray & Christmas Inc. showed layoffs announced by US employers quintupled in February from a year earlier. The Fed is counting on higher rates cooling the labor market to bring down inflation.
Economists surveyed by Bloomberg News are projecting a 225,000 increase in payrolls in February but they reckon just a little strength in the data will be all it takes for the Fed to return to large rate hikes.
–With assistance from Marcus Wong.
(Updates yields in second paragraph, updates charts.)
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