By Sebastian Pellejero
The yield on the two-year Treasury settled at a record low on Thursday after data showed the continuing hit to the U.S. labor market from the pandemic shutdowns.
The two-year Treasury bill yield finished Thursday's trading session at 0.129%, according to Tradeweb, down from 0.180% at Wednesday's close. That marks a record low close for the 2-year yield, last hit in September 2011 when it reached 0.157%. Yields fall as bond prices rise.
The two-year yield typically moves with investors' expectations for central bank policy and Federal Reserve officials have repeatedly signaled they intend to hold rates near zero until the U.S. is well on the road to recovering from the economic blow of the pandemic lockdowns. Thursday's decline came after data showed another 3.2 million workers filing for unemployment benefits.
Federal-funds futures, which investors use to bet on central bank policy, on Thursday suggested some think the Fed could cut rates even more by the end of the year -- possibly below zero, according to CME Group data. While negative rates proliferated elsewhere in the world after the financial crisis, Fed officials have said they don't see them as appropriate U.S. policy.
Short-term Treasury bills have seen an explosion of supply in recent months, including last week's auction of $42 billion in new notes. That has increased the two-year market by 50% year-to-date. Despite the increase in supply, short-term yields have hovered near zero as investors piled into T-bills during the recent market rout since they can be quickly converted into cash.
On Wednesday, the Federal Reserve announced that it plans to ramp up auctions of longer-dated Treasury securities, which some Wall Street analysts say could pull investors away from shorter-term debt, driving yields up.
The yield on the benchmark 10-year note, which tends to move more with investors expectations for growth and inflation, fell to 0.630% Thursday, according to Tradeweb, from 0.709% at Wednesday's close. The 30-year yield fell to 1.321% intraday from 1.412% Wednesday.
Given the uncertainty surrounding the direction of the U.S. economy, a pause in short-term T-bill supply could drive yields even lower if demand remains strong, said Jim Vogel, interest-rates strategist at FHN Financial. Thursday's move, however, came quicker than expected.
"If interest rates are low and the Fed has answered the question on new supply, it makes sense for 2-year yields to go lower," said Mr. Vogel. "But not all in one day."
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