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Bond Report: 10- to 30-year Treasury yields lead drop after U.S. inflation gauge shows signs of cooling

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Bond yields held near recent lows as investors continued to absorb the latest comments from Federal Reserve Chair Jerome Powell and awaited important inflation data.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.330%

slipped by less than 1 basis point to 4.326%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.608%

rose 1 basis point to 3.616%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.705%

fell 2.6 basis points to 3.713%.

What’s driving markets

Two-year Treasury yields, which are particularly sensitive to monetary policy moves, held near their lowest levels in nearly five weeks as investors parsed the latest comments from Powell.

Such short term yields were down 35 basis points from their 15-year high of 4.73% hit on November 7, having taking a further leg lower on Wednesday after Powell confirmed market expectations that the Fed will likely ease the pace of its rate hikes.

Markets are now pricing in a 82% probability that the Fed will raise interest rates by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th, according to the CME FedWatch tool.

The previous four Fed rate hikes have been 75 basis points as it strived to damp inflation that recently hit 40-year highs. The chances of a 25 basis point rise at the meeting in February is priced at 48%, with another 50 basis points priced at 44%.

The central bank is expected to take its Fed funds rate target to 4.92% by May 2023, according to 30-day Fed Funds futures.

Economic reports due on Thursday include the weekly initial jobless claims and the PCE price index data for October at 8:30 a.m.; the final reading of November’s S&P manufacturing PMI survey at 9:45 a.m.; and the November ISM manugacturing index at 10 a.m.. All times Eastern.

There are two more Fed speakers on the slate, too. Fed Governor Michelle Bowman is due to deliver comments at 9:30 a.m. and Fed Vice Chair Michael Barr speaks at the American Enterprise Institute at 3 p.m.

U.K. 10-year gilt yields
TMBMKGB-10Y,
3.097%

fell 4.4 basis points to 3.118% after a survey from Nationwide, the mortgage lender, showed house prices falling at the fastest pace since the start if the pandemic.

What are analysts saying

“While Powell yesterday strongly hinted that the pace of tightening would slow this month, likely to 50bps, he also reiterated that rates still have further to rise thereafter and will likely remain higher for longer than the Fed’s previous forecast update in September,” noted strategists at Daiwa Capital Markets.

“In terms of today’s data flow, of interest will be personal income and spending numbers for October, with only a modest increase in income expected (0.3%M/M) but firmer nominal spending numbers (0.9%M/M) due not least to high prices.”

“This notwithstanding, the closely watched core PCE deflator is expected to rise at a softer pace (0.3%M/M) than in recent months. And following the slump in last week’s flash manufacturing PMIs, focus today will also be on the more widely-followed manufacturing ISM,” Daiwa concluded.

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