Wild Ride in Treasurys as Investors React to Hawkish Fed Minutes, Dovish Draghi Comments

U.S. Treasury markets posted a wicked two-sided trade on Thursday. The first move by yields was to the upside, driven by Wednesday’s hawkish Fed minutes, which strongly indicated the Fed will remain on its tightening path. Yields began to fall on safe-haven buying after European Central Bank President Mario Draghi criticized plans by certain member countries to increase borrowing limits, sending Italian and Spanish yields up sharply.
James Hyerczyk
Caution - Higher Interest Rates Ahead
Caution – Higher Interest Rates Ahead

Rising interest rates and the U.S. Dollar were back in focus on Thursday following the release of the Federal Reserve’s hawkish minutes from its September meeting the previous session. Treasury yields traded near multi-year highs, driving the dollar to a more-than-one week high as investors were largely influenced by Fed policymakers who stand united on the need to raise borrowing costs gradually in order to hold the economy steady.

On Thursday, December U.S. Dollar Index futures settled at 95.638, up 0.341 or +0.36%.

In other news, China’s currency traded near a three-month low against the dollar at 6.9490 Yuan per dollar, after a semiannual report by the U.S. Treasury refrained from naming China a currency manipulator but showed concern about Yuan depreciation.

“Of particular concern are China’s lack of currency transparency and the recent weakness in its currency,” said Treasury Secretary Steven Mnuchin.

U.S. Treasury Markets

U.S. Treasury markets posted a wicked two-sided trade on Thursday. The first move by yields was to the upside, driven by Wednesday’s hawkish Fed minutes, which strongly indicated the Fed will remain on its tightening path. Early in the trading session, the U.S. two-year Treasury yield hit a high of 2.907 percent, its highest level since June 25, 2008, before falling to 2.878 percent.

Yields began to fall on safe-haven buying after European Central Bank President Mario Draghi criticized plans by certain member countries to increase borrowing limits, sending Italian and Spanish yields up sharply.

Stock market weakness in Europe and the United States also encouraged investors to buy German bunds and U.S. Treasurys as safe-haven investments, helping to drive yields from their highs.

At the end of the session, the three major government debt instruments had fallen well off their highs. The short-term 2-Year Treasury note yield settled at 2.883 percent. The benchmark 10-Year Treasury note settled at 3.179 percent and the long-term 30-Year Treasury bond finished at 3.364 percent.

U.S. Economic Data

U.S. Weekly Unemployment Claims dropped in the previous week and the number of Americans on jobless rolls returned to levels not seen since 1973, the Labor Department reported Thursday.

Initial state jobless claims decreased 5,000 to a seasonally adjusted 210,000 for the week-ended October 13. Data for the prior week was revised to show 1,000 more applications received than previously reported. Claims fell to 202,000 during the week-ended September 15, the lowest level since November 1969.

The Philadelphia Federal Reserve Index showed that business conditions for the mid-Atlantic region slipped to a reading of 22.2 in October from 22.9 in September thanks to a decline in new orders.

The survey went on to show higher employment at factories in the region, with more than 30 percent of responding firms saying they had increased payrolls.

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