US yields rise as bond market steadies ahead of payrolls

US jobless claims rise in latest week

US productivity slows in Q4

US rate futures price in 46 bps of easing in 2025

US 2/10 yield curve hits flattest since December 23

By Gertrude Chavez-Dreyfuss

NEW YORK, – U.S. Treasury yields edged higher on Thursday, recovering from sharp declines in the previous session, as the bond market stabilized a bit, with the U.S. having temporarily averted a disastrous trade war with Canada and Mexico.

The tariff threat, however, remains a lingering concern, with China’s import duties on U.S. goods set to take effect on February 10.

“The market is not only going to be data-dependent, but also policy-dependent,” said Vishal Khanduja, portfolio manager and head of broad markets fixed income at Morgan Stanley Investment Management in Boston. “At this time, fiscal policy will drive quite a bit of the volatility and the direction for the markets as well.”

Aside from tariffs, Khanduja expects news on fiscal deficits, taxes and deregulation to also stoke bond market volatility.

In afternoon trading, U.S. benchmark 10-year yield edged higher to 4.438%, up 1.8 basis points .

U.S. 30-year yield also inched up at 4.648%.

On the front end of the curve, the U.S. two-year yield rose 2.3 bps to 4.208%.

Market participants are now looking ahead to Friday’s nonfarm payrolls report for January, with a Reuters poll forecasting 170,000 new jobs created, down from 256,000 in December.

Friday’s report will also include the annual benchmark payrolls revision to the establishment survey and updated population controls in the household survey. The preliminary estimate of the benchmark revision showed a downward adjustment of 818,000 to cumulative payrolls growth from the period of April 2023 to March 2024. “This particular series … will offer context on the impact of immigration and provide a rough road map of the potential downside impact on payrolls in the event that Trump is successful with his immigration agenda,” BMO Capital Markets in a research note.

Treasuries showed little reaction to Thursday’s economic data pointing to a rise in U.S. jobless claims and a lower-than-expected productivity in the fourth quarter.

A report from the Labor Department said initial claims for state unemployment benefits rose 11,000 to 219,000 for the week ended February 1. Economists polled by Reuters had forecast 213,000 claims for the latest week.

Another piece of data showed U.S. worker productivity growth slowed more than expected in the fourth quarter, driving up labor costs. Nonfarm productivity, measuring the hourly output per worker, increased at a 1.2% annualized rate last quarter after growing at an upwardly revised 2.3% pace in the July-September quarter.

Post-data, U.S. rate futures have priced in about 46 bps of easing this year, or nearly two rate cuts of 25 bps each. The percentage has been in the 45% range for most of the week, according to LSEG calculations. The Fed is expected to be on hold for several policy meetings, but will likely resume cutting rates again either in June or July.

The U.S. yield curve, meanwhile, earlier flattened on Thursday, with the spread between two-year and 10-year yields hitting 20.6 bps, the narrowest gap since December 23. The curve was last at 23 bps, slightly up from 22.7 bps late Wednesday.

Yield curves typically steepen, with an upwardly sloping shape, in the midst of an easing cycle. That remains a popular trade in the bond market.

But since hitting its steepest level since early May 2022 of 42.60 bps in mid-January, the curve has steadily flattened or declined.

Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income in New York, said the curve flattening, which meant having lower long-dated yields compared with those on the short end, over the last two days was due in part to the Treasury’s refunding announcement.

The Treasury announced on Wednesday it would keep auction sizes unchanged in notes and bonds through the April quarter, but did not provide guidance as to when it would increase them.

“Given that there is the fear … of deficits, the follow-on fear is reduced bill issuance and more long-term Treasury issuance,” said Tipp. “That was deferred. The markets were relieved that the Treasury is not pushing … more duration on them.”

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