US yields higher after data, Lutnick comments

U.S. Treasury yields were mostly higher on Thursday as investors gauged the latest batch of economic data for signs of cracks in the economy ahead of Friday's government payrolls report.

Weekly initial jobless claims fell by 21,000 to a seasonally adjusted 221,000, according to the Labor Department, below expectations of economists polled by Reuters of 235,000.

The data was in contrast to an earlier report from global outplacement firm Challenger, Gray & Christmas which said on Thursday that planned job cuts vaulted 245% to 172,017 last month, the highest level since July 2020 when the economy was in the midst of the COVID-19 pandemic, and the highest February total since the global financial crisis 16 years ago.

Uncertainty has swirled around Trump's tariff announcements and their effect on prices, and the labor market impact from actions by the Department of Government Efficiency under Elon Musk to downsize the federal government, which has driven yields lower in recent weeks on concerns about slowing economic growth.

"We've seen a pretty good steepening in the U.S. yield curve," said Tom di Galoma, managing director at Mischler Financial.

"The curve should end up being flatter but what's going on right now is just there's just a real struggle with the tariffs and what the long-term budget outlook is for a lot of these economies."

Yields moved higher after comments from U.S. Commerce Secretary Howard Lutnick, who said the recent tariff reprieve announced for automakers will likely include all products covered under the U.S.-Mexico-Canada Agreement.

The yield on the benchmark U.S. 10-year Treasury note (US10YT=TWEB) rose 6.7 basis points to 4.336%.

Benchmark German Bund yields rose again after recording their biggest daily rise in more than 25 years in the prior sessions, as Berlin's plans for a huge spending package led investors to expect a massive increase in German bond supply, while the European Central Bank cut interest rates by 25 basis points but suggested it may not reduce rates again next month.

Other U.S. economic data showed the trade deficit surged 34.0% to an all-time high of $131.4 billion in January from a revised $98.1 billion in December amid front-loading of imports ahead of tariffs, suggesting that trade could be a drag on economic growth in the first quarter.

The yield on the 30-year bond (US30YT=TWEB) rose 6.8 basis points to 4.627%.

Market expectations that the Fed may have latitude for more rate cuts this year than recently thought due to a slowing economy have been growing. Traders are pricing in 69 basis points of cuts by the U.S. central bank this year, up from previous bets for less than 50 basis points of easing, according to LSEG data.

Philadelphia Federal Reserve President Patrick Harker said trouble may be brewing for a U.S. economy that is currently in good shape but showing signs of stress in the consumer sector and risks to the inflation outlook.

Fed Chair Jerome Powell is scheduled to speak on Friday.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes (US2US10=TWEB), seen as an indicator of economic expectations, was at a positive 33.4 basis points after climbing to 35.6, its highest since January 28.

The two-year (US2YT=TWEB) yield, which typically moves in step with interest rate expectations, rose 1.2 basis points to 3.998%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) (US5YTIP=TWEB) was last at 2.553% after closing at 2.583% on Wednesday.

The 10-year TIPS breakeven rate (US10YTIP=TWEB) was last at 2.331%, indicating the market sees inflation averaging about 2.3% a year for the next decade.