U.S. Treasury yields move higher on vaccine optimism

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These are the last days of small government and the Biden administration will make sure of that


U.S. Treasury yields rose on Friday in choppy trading to end higher for January after largely positive vaccine developments helped to bolster hopes the U.S. economy could make a swifter recovery.

What are Treasurys doing?

The 10-year Treasury note yield
TMUBMUSD10Y,
1.080%

rose 3.5 basis points to 1.090%, unchanged for the week and up 17.7 basis points this month. The 2-year note rate
TMUBMUSD02Y,
0.109%

was down 0.6 basis point to 0.115%, sliding 0.8 basis point this week and 0.4 basis point in January.

The 30-year bond yield
TMUBMUSD30Y,
1.840%

climbed 3.7 basis points to 1.855%, flat for the week but up 21.3 basis points this month.

What’s driving Treasurys?

Weighing on haven assets, Johnson & Johnson announced its vaccine was 66% effective in preventing moderate to severe cases of COVID-19 in a late-stage trial, but was found less effective against the South African variant of the disease. And Novavax 
NVAX,
+64.87%

said late Thursday its vaccine candidate was found to be 89% effective against the disease.

The possibility of more vaccines coming online has bolstered expectations households and businesses could face some semblance of normal economic life this year.

And in Europe, a Reuters news report on Friday said ECB officials saw limited benefits from cutting interest rates further. The ECB’s key facility deposit rate sits at negative 0.5%.

Earlier in the week, ECB governing council member Klaas Knot sparked speculation that further rate cuts could be forthcoming to stem the euro’s rally.

The mixed messaging pushed eurozone bond rates higher, dragging Treasury yields up. The 10-year German government bond yield
TMBMKDE-10Y,
-0.514%

climbed 3.1 basis points to negative 0.501%.

In U.S. economic data, personal income rose by 0.6%, while the core personal consumption expenditures inflation gauge rose 0.3%, lifting the yearly measure to 1.5%. Consumer spending fell 0.2%.

A reading of consumer sentiment this month edged down to 79 from an initial 79.2, according to an index produced by the University of Michigan. Pending home sales dropped 0.3% in December, marking its fourth straight decline.

What did market participants say?

The ECB “clearly views a cut to its deposit rate as  the most appropriate instrument for dealing with this currency strength,” Rabobank analysts said.

“However, it also appears to be pursuing a ‘having its cake and eating it’ strategy in that it has said that it doesn’t have any intention of cutting the deposit rate at the present time but it also doesn’t want the market to rule out the possibility of such a cut in the future,” they said.



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