Treasuries extended their gains through a stronger-than-expected jobless claims report, taking the 10-year yield to about 4.96%, its first trip below 5% since Sept. 23. Two-year yields fell nearly as much, a sign that traders were repricing the Fed's near-term path as well as buying safety.
Before dawn on Thursday, the bond market's response to higher oil looked like it might be a thin-volume haven trade that would not last. By early afternoon in New York, it had grown.
The 10-year Treasury yield fell to about 4.96% in early afternoon trading, down about 18 basis points on the day, after slipping about 6 basis points by early European trading. Thursday was the first time since Sept. 23 that the benchmark traded below 5%. The iShares 20+ Year Treasury Bond ETF rose 1.8%.
Oil did not let up. Brent crude traded at about $112.75 a barrel at 1:46 p.m. Eastern, up 3.6% and near the day's high to that point, at its highest level since May. Gold futures fell 2.2% to about $4,058 an ounce.
The test it passed
The U.S. session offered at least one clear reason for yields to rise. Weekly jobless claims fell to 194,000 at 8:30 a.m., below the 200,000 economists expected, a sign of a labor market that gives the Federal Reserve little reason to back off. Yields kept falling anyway, through the report and through the midday slide in technology shares.
That rules out the simplest explanation for the morning move, that it was a reflex in thin overseas trading that U.S. data would reverse. It does not identify the driver. The Gulf escalation, the AI-led equity selloff and positioning all overlapped in the same hours.
A rally across the curve
The decline was broad. Five- and 10-year yields led, each down about 18 to 20 basis points on the day by early afternoon. The two-year yield, the maturity most tied to expectations for Fed policy, fell more than 15 basis points, to about 4.65% by around 2:20 p.m. The 30-year yield fell somewhat less, about 14 basis points, to near 5.30%.
A two-year move that size means this was more than a flight to long-dated safety. Traders also took some tightening out of the near-term outlook. Prediction markets show the same thing: odds of a rate increase at next week's Fed meeting were cut roughly in half during the session, although markets still put better-than-even odds on a hike by December.
Who benefited
The equity damage was narrow. The Nasdaq Composite fell 2.4% and the S&P 500 1.3%, but the Russell 2000 slipped only 0.2%. The SPDR S&P Bank ETF rose 2.2%, and the iShares U.S. Home Construction ETF jumped 4.5% as long-term yields fell. Energy stocks fell 1.2% despite the rise in crude. The CBOE Volatility Index rose 2.3 points to about 19, and the dollar lost 0.7% against the yen.
Data outside the U.S. pointed to softer growth. Euro-area consumer confidence fell to minus 17.9 in October's flash reading, against a forecast of minus 17.0, and the Kansas City Fed's manufacturing survey showed new orders dropping to 3 from 24.
The risk to the trade
The inflation side has not gone away. Heating oil futures rose 2.8%, a direct read-through to distillate prices, and gold's decline was read by some in the market as a sign that rates are expected to stay high. Supply arrives next week on either side of the Fed's Oct. 27 to 28 meeting: two-year notes on Oct. 26, five-year notes on Oct. 27 and seven-year notes on Oct. 29. Those sales will test whether buyers want duration at yields below 5%.
What to watch
Whether the 10-year closes below 5%, where Brent settles, and Friday's flash purchasing managers' surveys for the U.S., euro area and U.K.