The confidence that has recently enveloped the Treasury market seems to be evaporating, or so one could reason in light of yesterday’s jump in the yield on the benchmark 10-year Note.
As of Thursday’s close, the 10-year yield was 4.64%, up sharply from Wednesday’s 4.59%. At one point yesterday, the yield was nearly 4.67%. As a result, the 10-year yield is near its previous highs of late October, when 4.68% was briefly touched.
What’s going on? There’s no shortage of theories circulating, ranging from the usual suspects to some fresh catalysts for anxiety. To be sure, some pundits are still predicting an economic slowdown, if not worse, including the estimable Economic Cycle Research Institute. But those with the opposite view have the upper hand at the moment. Indeed, adding to the momentum among the latter is yesterday’s 25-basis-point hike in the European Central Bank’s key rate to 2.5%. Warning of inflation risks in 2007, ECB head Jean-Claude Trichet explained that he was intent on nipping the threat in the bud. Did the Europeans frighten traders in the Treasury market?
Another candidate for thinking that higher rates are still coming is the realization that the federal government’s deficits may be deeper in red ink than previously thought. There’s much debate about whether deficits and higher rates are truly linked, but expectations of bigger government debts can still move bond prices. On that note, Govexec.com, the website for Government Executive magazine, yesterday reported that the Treasury Department sent a “little-noticed” study to congressional leaders “that paints a bleaker picture of the nation’s finances than is widely accepted and is beginning to attract attention as lawmakers prepare for election-year budget battles.”
Meanwhile, Treasury Secretary John Snow told the San Francisco Chronicle that wages are at a “tipping point.” He predicted that they’ll start rising. “For the last three months or so, real wages are up something like 1.5, 1.6 percent,” he said.
Cabinet members like to speak of such things, and are forever suggesting that sunnier days are just around the corner for the masses. But at this particular juncture, investors might think twice before dismissing Snow’s outlook. The economy, after all, has been showing signs of strength recently, as we noted yesterday. Adding to the optimism is yesterday’s update on weekly jobless claims: the advance figure for seasonally adjusted initial claims was 294,000 for the week through February 25, the Labor Department reported on Thursday. That’s the seventh straight week of a below-300,000 reading, convincing many economists that the labor market is clearly growing.