Morning Bid: Bonds breathe sigh of relief

Bonds found solace on Thursday as investors breathed a sigh of relief amid a morning bid. The U.S. and Japanese bond markets experienced a slight easing of yields, but the overall outlook for debt investors remained relatively unchanged. The surge in oil prices above $90 a barrel persisted due to escalating tensions between the U.S. and Iran, which has heightened inflation concerns.

This has led central banks to tighten monetary policy, pushing the probability of a Federal Reserve 25-basis-point rate hike this month to 67% from 37% just a week ago, according to CME Group’s FedWatch tool.

Federal Reserve Bank of New York President John Williams acknowledged the rising long-term bond yields, attributing them to a robust economy, but emphasized the need for more data before making a final decision on rates. The upcoming labor figures on Wednesday and the closely watched nonfarm payrolls report on Friday are expected to provide a clearer picture. Governor Christopher Waller is scheduled to speak at a Reuters NEXT event on Thursday, suggesting that higher rates might be required in the near term.

In Europe, the European Central Bank and the Bank of Japan also grappled with inflation concerns. Japanese services sector data on Thursday revealed a five-month high expansion rate, indicating a robust economy capable of handling a Bank of Japan rate hike. This sentiment bolstered the yen, which reached a three-week high against its U.S. counterpart.

Japanese government bonds, which had been under pressure, found a glimmer of relief after a successful auction of 30-year securities, with yields decreasing from a 30-year peak of 3.015%.

In the corporate sector, Broadcom reported strong expectations for artificial intelligence chip sales over the next two years, even as its shares experienced a decline of more than 3% in extended trading. Equity futures indicated slight gains in Europe and the U.S., with the pan-region Euro Stoxx 50 futures up 0.03% at 6,373 and S&P 500 e-minis up 0.07% at 7,682.8.

Key developments that could influence markets on Thursday include bond auctions in France and the UK, as well as the release of S&P PMI data for various regions.