TREASURIES-10-year yield hits new '24 low as regional banks fears rise

(Updates market activity)

By David Randall

NEW YORK, Feb 1 (Reuters) - U.S. Treasury yields on Thursday dropped to their lowest levels so far in 2024, as renewed concerns about the regional banking sector and higher-than-expected jobless claims pushed investors toward safer assets.

Yields dropped a day after the Federal Reserve's policy meeting in which Fed Chair Jerome Powell confirmed that interest rates had peaked for this cycle and would likely move lower in coming months as inflation continues to fall. In a widely expected move, the Fed kept benchmark interest rates unchanged.

Overall, investors are pricing cumulative cuts of 147 basis points by the Fed's December meeting, instead of 160 basis points seen at the start of the year. Futures markets are pricing in a roughly 90% chance that the Fed will start to cut rates at its May meeting, instead of in March, according to CME's FedWatch Tool.

"The Fed essentially believes that policy is as tight as it is going to get," said Jeff Klingelhofer, co-head of investments at Santa Fe, New Mexico-based Thornburg Investment Management. "The Fed also many times suggested that the current level of rates is having an impact and bringing economic activity and inflation down."

The 10-year Treasury note yield was down 10.7 basis points at 3.858%, the lowest since late December. It is down about 35 basis points from its 2024 high reached on Jan. 19.

Yields were also pressured after New York Community Bancorp posted a surprise loss and cut its dividend by 70%, reigniting concerns about regional banks 11 months after the collapse of Silicon Valley Bank.

"If we didn't have the issue with New York Bancorp, where concerns about tight credit conditions clearly affected the profitability of that bank, then we would probably be talking about a different story for rates," said Paresh Upadhyaya, director of fixed currency strategy Amundi US in Boston.

The 30-year Treasury bond yield was down 11.9 basis points at 4.096%.

The Labor Department said initial claims for state unemployment benefits increased 9,000 to a seasonally adjusted 224,000 for the week ended Jan. 27. Economists had forecast 212,000 claims for the latest week. U.S. worker productivity grew faster than expected in the fourth quarter, keeping unit labor costs contained, the Labor Department said.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 2.9 basis points at 4.200%.

A closely watched part of the U.S. Treasury yield curve measuring the gap between two- and 10-year notes, seen as an indicator of economic expectations, was at -31.4 basis points. (Reporting by David Randall; Additional reporting by Herbert Lash; Editing by Ros Russell, Angus MacSwan, Richard Chang and Jonathan Oatis)