U.S. Treasury yields retreated on Thursday morning ahead of a batch of economic reports and the second and final day of congressional testimony from Federal Reserve Chairman Jerome Powell.

On Wednesday, Powell’s comments suggesting that tapering the Fed’s $120 billion asset purchases was still a ways off, helped to fuel some buying in government debt, pushing yields lower.

How Treasurys are performing

The 10-year Treasury note yields
TMUBMUSD10Y,
1.322%

1.325%, versus 1.356% at 3 p.m. Eastern Time.

The 30-year Treasury bond rate
TMUBMUSD30Y,
1.940%

was at 1.952%, compared with 1.989% a day ago.

The 2-year Treasury note
TMUBMUSD02Y,
0.229%

was yielding 0.229%, little-changed from Wednesday.

Fixed-income drivers

Treasury buyers are shaking off inflation fears to buy bonds after Powell said the labor market is still “a ways off” from where it needs to be for the Fed to end monthly purchases of $80 billion of Treasurys and $40 billion of mortgage-backed securities that had helped to support financial markets and the economy since the start of the COVID pandemic last year.

“Conditions in the labor market have continued to improve, but there is still a long way to go,” Powell told a House Financial Services Committee on Wednesday, emphasizing that he viewed pricing pressures to be the result of short-term factors, including supply-chain bottlenecks, base effects, or comparisons with prices that had fallen sharply in 2020 and a surge in demand as the economy reopens.

The 10-year Treasury drifted to an intraday low yield around 1.308% and the 2-year and 10-year yield curve, or differential between short-dated government debt and its longer-dated counterpart was at 1.096 percentage points, according to FactSet.

A narrowing yield curve means borrowers pay less of a premium than previously to borrow over a longer period and suggests investors fear economic growth may be peaking.

Outside of the U.S., China’s economic growth slowed to 7.9% over a year earlier in the three months ending in June as a rebound from the coronavirus pandemic leveled off.

Meanwhile, inflation expectations continued to climb, with break-even
rates on five-year Treasury inflation-protected securities, or TIPS, rising to 2.60% from around 2.45% on Monday.

Powell is slated to testify before the Senate Banking Committee later in the session at 9:30 a.m. Eastern Time.

Before that, at 8:30 a.m. Eastern, the U.S. Labor Department will publish weekly jobless benefit claims report for the week ended July 7, which are expected to show 368,000 claims, versus 373,000 in the week-ago period.

Meanwhile, a report on manufacturing activity in the Philadelphia area, the Philly Fed index, for July is expected to show a reading of 28.5, according to a consensus of economists polled by Econoday. A separate survey on manufacturing activity in New York state, the Empire State Manufacturing index, for July is forecast to come in at 18.3.

Any reading above zero for either index indicates improving conditions.

Data on import and export prices for June also are due at 8:30 a.m., while a study on industrial production from the Fed is due at 9:15 a.m.

Meanwhile, Chicago Fed President Charles Evans will speak at 11 a.m.

What strategists and traders say

“[U.S. Treasury] yields declined after Fed Chair Jerome Powell reiterated the message that current inflationary pressure is mostly temporary and that the Fed should remain dovish to meet its goals in terms of inflation and employment,” wrote analysts at UniCredit in a Thursday note.  

“He is unlikely to deviate from the remarks he made yesterday to the House Financial Services Committee, when he said that the very high inflation rates were coming from a small group of categories linked to the reopening of the economy and bottlenecks, which were likely to be transitory; that ‘substantial further progress’ is ‘still a ways off’ and that the Fed would provide ‘advance notice’ before tapering the pace of its asset purchases,” the analysts said.

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