Treasury yields fall as investors weigh central bank decisions, omicron spread

  • The number of jobless claims filed last week is due out at 8:30 a.m. ET on Thursday.
  • Auctions are due to be held on Thursday for $30 billion of 4-week bills and $25 billion of 8-week bills.

U.S. Treasury yields were broadly lower on Thursday, as investors continued to digest the Fed's latest policy decision.

The yield on the benchmark 10-year Treasury note dropped 3 basis points to 1.433% at 9:55 a.m. ET. Yields for shorter-term Treasuries fell. The yield on the 30-year Treasury bond rose by more than 1 basis point to 1.869% Yields move inversely to prices and 1 basis point is equal to 0.01%.

"What the market's telling you is the Fed doesn't have much scope to go beyond two or three hikes," said Kathy Jones, chief fixed income strategist at Charles Schwab.

"I don't think the market thinks the Fed is really going to raise rates to 2.5% over time," she added.

Following it's two-day policy meeting, the Fed announced Wednesday that it would be buying $60 billion of bonds a month starting in January. This is half the level it bought prior to the November taper and $30 billion less than in December.

The Fed was tapering by $15 billion a month in November, doubled that in December, and will accelerate the reduction further come 2022.

This would see the central bank wrap up its tapering program by late winter or early spring.

Fed officials expect three rate hikes in 2022, according to the central bank projections released on Wednesday.

Ron Temple, co-head of multi-asset and head of U.S. equities at Lazard Asset Management, said on Wednesday that with the economy "firing on all cylinders," the Fed was right to reduce its asset purchases.

However, he warned that the Fed should be "judicious" about when and how quickly it raises interest rates.

The Fed is not the only central bank moving toward tighter policy. On Thursday the Bank of England announced its first rate hike since the pandemic began. However, European Central Bank President Christine Lagarde said there was no plan for rate hikes by the ECB in 2022, according to Reuters.

In recent weeks the U.S. yield curve has flattened, with short-term rates rising to converge with long-term rates. Fed Chair Jerome Powell said on Wednesday that this could be due to foreign investors buying long-term bonds and holding that rate down.

David Norris, head of US Credit at TwentyFour Asset Management, said the curve should normalize as the economic recovery progresses.

"In order for the curve to flatten further, they'd really have to not believe in an economic recovery at this stage. And based on the Powell's statements, and given their projections of GDP growth and unemployment rate, the market is in a good place and is still strong," Norris said.

On the data front, weekly jobless claims came in at 206,000, slightly higher than expected but still well below readings from earlier in the year. Meanwhile, housing starts came in stronger than expected.

The IHS Markit flash reading for its December PMI showed a slower expansion in manufacturing and services.

Auctions are due to be held on Thursday for $30 billion of 4-week bills and $25 billion of 8-week bills.

CNBC's Jeff Cox contributed to this market report.