Bond Report: Treasury yields shift lower as traders brace for employment report

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U.S. Treasury yields inched lower on Friday, but remained on track for a weekly rise, as investors awaited the details of the January employment report.

What are Treasurys doing?

The 10-year Treasury note yield TMUBMUSD10Y, -2.22% fell 3 basis points to 1.614%, briefly edging below the 1.60% level in early morning trading, while the 2-year note rate TMUBMUSD02Y, -1.91% was down 2.4 basis points to 1.423%. The 30-year bond yield TMUBMUSD30Y, -2.07% slipped 4 basis points to 2.074%. Bond prices move inversely to yields.

What’s driving Treasurys?

Treasurys rallied as overseas data underlined how weakness in Europe’s manufacturing sectors still lingered. German industrial production fell 3.5% in December, versus a 1.2% increase in November. Similarly, French industrial production dropped 2.8% in December, down from no change in November.

The coronavirus outbreak also lifted appetite for haven investments as more companies reported that the virus outbreak was hitting sales or disrupting their supply chains. The latest tally shows that there are more than 31,000 confirmed coronavirus cases, and 638 deaths due to the illness.

Still, investors said they would stay attuned to the U.S. nonfarm employment report. MarketWatch-polled analysts anticipate a reading of 164,000 in January, holding the unemployment rate flat at 3.5%. Average hourly earnings are expected to tick up by 0.3%.

See: U.S. likely added 164,000 jobs in January — but hiring in 2019 might not look as rosy

On the Federal Reserve front, Fed Vice Chairman for Supervision Randal Quarles said the U.S. central bank could encourage banks to tap the so-called discount window, where they have historically borrowed funds from the Fed in return for collateral during short-term liquidity shortages.

Quarles also said he would prefer a smaller balance sheet, which has ballooned to around $4.15 trillion due to the central bank’s monthly buying of Treasury bills and repurchasing operations.

Read: Encouraging banks to tap Fed discount window could prevent another repo market freeze, says Quarles

What did market participants’ say?

“Treasurys benefited from a modest flight-to-quality bid overnight, bringing 10-year yields back below 1.60% as investors await this morning’s payrolls report. The impetus for the buying interest was less obvious than one might prefer; however, the combination of rising coronavirus cases reported, growing global supply chain concerns, and dismal European production data have received the lion’s share of the credit,” wrote Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets.

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