10-year Treasury yield tops 2.9% on better-than-expected economic data

  • Initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 232,000 for the week ended April 14.
  • Also Thursday, the Philadelphia Fed Index, a measure of manufacturing activity in the district, came in at 23.2 for March, higher than the 20.5 level expected.
  • "We have easing of geopolitical tensions in the world, we have higher commodity prices, we're in the ninth year of an economic expansion, and the Fed looks like it will raise rates in June," said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management.

The yield on the 10-year Treasury note climbed above 2.9 percent, a key level it's failed to stay above multiple times this year, as new data pointed to a strengthening U.S. economy.

Traders said rising yields in the German bond market also pushed domestic rates higher on Thursday.

The U.S. five-year note yield hit a high of 2.7635 percent, its highest level since August 2009 when it yielded as high as 2.7772 percent.

The yield on the benchmark 10-year Treasury note was higher at 2.91 percent at 2:29 p.m. ET, while the yield on the 30-year Treasury bond was higher at 3.097 percent. Bond yields move inversely to prices.

The upward move in long-term yields come a day after the yield on the two-year Treasury note hit its highest level since September 2008.

In economic news, the Labor Department reported on Thursday that new applications for U.S. unemployment benefits fell last week. Initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 232,000 for the week ended April 14. The latest numbers likely suggested continued job growth and a tight labor market, often a precursor of wage inflation in the economy.

Also Thursday, the Philadelphia Fed Index, a measure of manufacturing activity in the district, came in at 23.2 for March, higher than the 20.5 level expected by Wall Street economists.

The Philly Fed reading "offers further evidence of one of our primary concerns this year — higher input prices squeezing profitability as demand wanes," wrote Ian Lyngen, head of rates strategy at BMO Capital Markets. "Treasuries were under pressure ahead of the data and the curve was modestly steeper."

An uptick in global rates also appeared to buoy U.S. Treasury yields on Thursday, with the 10-year German bund adding 5 basis points to its two-day climb. The 10-year bund hit a high 0.591 percent, its highest level since March 21, when the bund yielded as high as 0.604 percent.

"Just as low [foreign rates] have been keeping U.S. yields from rising, they will also have the opposite effect as they rise," said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management.

"We have easing of geopolitical tensions in the world, we have higher commodity prices, we're in the ninth year of an economic expansion, and the Fed looks like it will raise rates in June," he added.

The move upward in long-term yields has — at least briefly — stalled the steady flattening in the yield curve that's occurred over the past few months. In normal times, the yield curve slopes upward, reflecting a belief in future economic expansion.

However, when short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is worse; an inverted curve is often considered a signal of a pending economic recession.

"The long end of the curve, until recently, was of the belief that inflation isn't going to reach the level that the Fed has set or it's going to take a very long time to get there," said Kevin Giddis, head of fixed income capital markets at Raymond James.

"But one gets the feeling that we may only have a few more months of this kind of behavior before things like the monumental issuance of debt, peaking wages, and falling consumer demand begins to take hold and put extreme pressure on economic growth," he concluded.

Speeches by the U.S. central bank and news from the U.S. Treasury will keep bond investors busy.

Looking to the U.S. Federal Reserve, Governor Randal Quarles will appear before the Senate Banking Committee, where he is set to give the semiannual testimony of the Federal Reserve's supervision and regulation of the financial system.

Cleveland Fed President Loretta Mester will be in Pittsburgh, appearing at an event called "An Evening with Dr. Loretta J. Mester," while Fed Governor Lael Brainard will be in Washington at the FIA's 2018 Global Finance Forum on regulatory reform.