Any investor fears spurred by Fed Chair Janet Yellen's words last month may be overblown, strategists suggest, saying interest rates are likely to remain unchanged for the foreseeable future.
"I do think in the short-term interest rates will stay relatively contained," Brian Rehling, chief fixed income strategist at Wells Fargo, said in an interview.
Investor anxiety about rising interest rates was evident last month when short-term municipal bond yields soared following a speech by Yellen. Intermediate-maturity bonds continued softening this week as the municipal market weakened following a yield hike in Treasuries.
"As sometimes happens there is a bit of an overreaction," a trader in New York said as short-term bonds steadied last week.
On Wednesday the yields for the eight-year bonds rose two basis points and bonds maturing from nine to 30 years grew by three basis points.
Treasury yields rose across the curve with the two-year note increasing two basis points to 0.47%, the 10-year by six to 2.82%, and the 30-year by five to 3.65%.
Anticipation surrounding Friday's employment situation report may be moving the market, Janney Capital Markets said in a report Thursday. If the report is extremely positive, it might encourage the Federal Reserve to escalate its monthly tapering or move up the first increase in interest rates, investors worry.
"Interest rate markets were under pressure in Wednesday trading, as the set-up for Friday's nonfarm payrolls release continued," Janney wrote.
Janney said the size of the Treasury selloff after an ADP Employment report Wednesday morning suggests some accounts entered shorts ahead of Friday's data. Private payrolls for March were 191,000, compared with an upwardly revised 178,000 in February, the data showed.
"For a bit longer time-frame, we expect interest rates to gradually rise," Rehling said. "Though I do stress the word 'gradually.'"
Yields were mixed on Thursday as the six-year rose as much as one basis point and 26- to 30-year bonds grew up to one basis point.
Bonds maturing from seven to 25 years held steady, and the short end of the curve is "under review," according to the Municipal Market Monitor.
Treasuries were also mixed with the two-year notes rising two basis points to 0.49%, and the 10-year and 30-year dropping by two and five basis points, respectively.
The largest deal of the week, a two-fold University of California deal totaling about $968.2 million of tax-exempt and taxable bonds, is expected to price Thursday. Wells Fargo Securities will bring the tax exempt bonds to market. The bonds mature serially from 2017 to 2034, with terms in 2044 and 2049. A retail order period was scheduled for Wednesday.
Goldman Sachs & Co is the lead underwriter for the taxable bonds, while Wells Fargo is the joint bookrunner. An indication of interest period was expected Wednesday. The deals are rated Aa2 by Moody's Investors Service and AA by Standard and Poor's.
There are no deals over $100 million slated for Thursday in the competitive market.
