The 10-year Treasury yield had its biggest drop in almost a week on Wednesday, despite data showing U.S. consumer confidence improved this month, as markets continued to focus on the economic impact of the omicron variant of the coronavirus.
U.S. bond markets will close an hour early Thursday and will remain closed in observance of Christmas on Friday.
What are yieldings doing?
What’s driving the market?
Investors were buying most government bonds on Wednesday, pressuring yields lower, even as data showed U.S. consumer confidence rose to 115.8 in December from a revised 111.9 in the prior month. Concerns about inflation fell from a 13-year high last month.
Meanwhile, existing home sales rose for a third straight month in November and updated data released Wednesday showed that the U.S. economy expanded at an annual 2.3% pace in the third quarter, up from the prior estimate of 2.1%.
Uncertainty about the economic impact of the omicron variant continued to linger despite the Biden administration’s plans to fight the spread of the virus and the Food and Drug Administration’s decision to authorize a Covid-19 antiviral pill from Pfizer Inc. PFE,
On one hand, preliminary reports that COVID-19 vaccines could still prove effective against the omicron variant have helped to stem the risk-off mood that impacted trading at the start of the week. Scientists in South Africa have also noted a significant drop in new COVID-19 cases, which could signal the omicron wave has passed its peak.
On the other hand, the holiday period remains overshadowed by the new variant that is causing case spikes in the U.S. and Europe, and which could result in new business and consumer restrictions.
Wednesday’s $17 billion auction in 5-year U.S. Treasury inflation-protected securities, or TIPS, was “a bit soft” and produced average statistics, according to BMO Capital Markets strategist Ben Jeffery.
Meanwhile, Federal Reserve officials are planning to end their bond purchases by March, much faster than previously expected. At their December meeting, policy makers also penciled in three interest rate increases for next year in the so-called dot plot, while keeping their long-run projection for the fed-funds rate, which currently stands between 0% and 0.25%, at 2.5% and raising their inflation forecasts through 2023.
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What strategists are saying
“We suspect Thursday’s most tradable new information will be the recommended early close as trading volumes thin and investors head for the exit ahead of the long weekend,” BMO’s Jeffery and Ian Lyngen wrote in a note. In a period of thin liquidity in the Treasury market, “the technicals may play a greater role in dictating the immediate price action.”