Bond Report: Treasury yields turn mixed after kicking off year with a jump

What are yields doing?

• The yield on the 10-year Treasury note
  TMUBMUSD10Y,
  1.667%
  was at 1.665%, compared with 1.628% at 3 p.m. Eastern on Monday. Yields and debt prices move opposite each other.

• The 2-year Treasury note
  TMUBMUSD02Y,
  0.757%
  yielded 0.77%, down from 0.784% Monday afternoon.

• The yield on the 30-year Treasury bond
  TMUBMUSD30Y,
  2.079%
  was at 2.074% versus 2.016% late Monday.

• On Monday, the 2-year yield rose to its highest since March 2, 2020, based on 3 p.m. levels, according to Dow Jones Market Data. Meanwhile, the 10-year climbed to its highest since Nov. 24 and the 30-year advanced to the highest since Nov. 23.

What’s driving the market?

Investors appear to have waved off concerns over the omicron variant of the coronavirus that causes COVID-19, with U.S. stocks remaining in a rally mode early Tuesday as the Dow Jones Industrial Average DJIA and the S&P 500 SPX advanced further since Monday’s record finishes. Treasury prices fell on maturities from 7 to 30 years out, sending those yields higher. Meanwhile, investor demand for 1- to 3-year government debt pushed those rates lower.

COVID-19 infections have surged, with the U.S. registering 1,083,948 cases on Monday, according to data collected by Johns Hopkins University — more than double the previous record of 486,428 set four days ago.

Hospitalizations for confirmed or suspected COVID-19 cases hit a seven-day average of 97,855 on Monday, according to data from the U.S. Department of Health & Human Services cited by The Wall Street Journal. That’s up 41% over the past two weeks but below the pandemic peak of 137,510 seen on Jan. 10, 2021, and a smaller peak of 102,967 seen on Sept. 4, 2021, amid the surge in the delta variant of the coronavirus.

Investors continue to look for the Federal Reserve to begin lifting rates as early as this spring, with traders pricing in a 61% chance of a rate move in March, when the central bank is expected to end its monthly asset purchases.

Data released Tuesday included the Institute for Supply Management’s gauge of manufacturing, which dropped to 58.7% in December from 61.1% in November, as U.S. manufacturers coped with persistent shortages. Economists polled by The Wall Street Journal had forecast the index to slip to 60%. Readings above 60% are considered exceptional and any number above 50% signals expansion.

A record 4.5 million Americans quit their jobs in November and job openings fell by 529,000 to 10.6 million on the last day of that month, the Labor Department said Tuesday.

Minneapolis Fed President Neel Kashkari is scheduled to discuss the economic outlook at 11:30 a.m.  

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What are analysts saying?

“Despite record national infection levels, yields finally continued their natural path higher. Is the ‘bad’ news discounted? The European example shows that the economic impact of omicron so far remains less worse than initially feared,” wrote analysts at KBC Bank in Brussels, in a Tuesday note.

“The monetary policy context continues to play a role as well. The Fed’s December decision to accelerate the taper process could already result in a March rate hike with some governors even calling to shrink the balance sheet starting in summer,” with this week’s economic data potentially strengthening those calls, they wrote. Jobs data due this week will indicate the tightness of the labor market, while the release of minutes from the Fed’s December meeting on Wednesday will offer more insight on the decision-making process, they said.