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Bond Report: 10-year Treasury yield slides below 2.70% after BOE rate hike, recession warning

Treasury yields fell significantly Thursday as investors weighed a reading on U.S. jobless claims and reacted to an outsize rate hike — and a recession warning — from the Bank of England.

What yields are doing

The yield on the 2-year Treasury note
TMUBMUSD02Y,
3.070%

fell to 3.062%, down from 3.108% at 3 p.m. Eastern on Wednesday.

The 10-year Treasury note yield
TMUBMUSD10Y,
2.690%

was 2.683%, compared with 2.747% Tuesday afternoon.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
2.976%

was 2.975% versus 2.976% late Tuesday.

What’s driving the market

Yields were pulling back after a rise in the previous session following a round of stronger-than-expected data on activity in the U.S. services sector and factory orders, as well as more warnings from Federal Reserve officials against expectations that fears of an economic slowdown would crimp prospects for interest rate increases to get inflation back under control.

The Bank of England on Thursday was the latest central bank to deliver an outsize rate increase, lifting its Bank Rate by half a percentage point to 1.75% — the largest hike since 1995 — as it warned that inflationary pressures continued to build and said a recession was likely to begin later this year.

Data showed initial jobless claims increased by 6,000 in the week ended July 30 from a revised 254,000 in the previous week. Claims are holding near a nine-month high as investors look for signs of a softening in a robust labor market as recession worries mount.

The U.S. July jobs report is due Friday. Employment gains in July are expected to drop to 258,000 from 372,000 in the prior month, a poll of economists by The Wall Street Journal estimates. If so, it would mark the smallest increase since December 2021.

See: Hiring slowdown? U.S. seen adding just 258,000 jobs in July

What analysts say

The Bank of England decision comes as there “now seems to be a view among investors that, across DM (developed markets), any acceleration in monetary tightening will only lead to a weaker economy, and hence less rate hikes further ahead and/or earlier rate cuts,” said Franziska Palmas, markets economist at Capital Economics, in a note.

“Indeed, sovereign bond yields have also fallen in the wake of recent chunky hikes by other DM central banks,” including the Fed, European Central Bank, Bank of Canada and Reserve Bank of Australia, she wrote.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21/22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

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