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Bond Report: 10-year Treasury yield rises to 7-week high

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Long-dated U.S. Treasury yields nudged higher Wednesday, with the 10-year note at its highest since mid-November as investors assessed the outlook for Federal Reserve policy and the economy in 2023.

What’s happening

The yield on the 2-year Treasury note BX:TMUBMUSD02Y edged down to 4.373% from 4.408% at 3 p.m. Eastern on Tuesday.

The 10-year Treasury note yield BX:TMUBMUSD10Y rose to 3.866% from 3.857% Tuesday afternoon, when it finished the New York session at its highest since Nov. 14.

The yield on the 30-year Treasury bond BX:TMUBMUSD30Y was at 3.954%, up from 3.941% late Tuesday, when it posted its highest finish since Nov. 15.

What’s driving markets

Yields on the benchmark 10-year note edged up in choppy, holiday-season trade amid a dearth of major market catalysts.

U.S. pending-home sales fell 4% in November, which is the sixth straight monthly drop, according to the index released Wednesday by the National Association of Realtors. The index was last at this level in the midst of the pandemic lockdown, in April 2020. Analysts polled by The Wall Street Journal had forecast the pending home sales index to drop by 1.8%.

On Thursday, weekly initial jobless claims will be released and Friday sees the Chicago PMI report. Together, the reports are not expected to meaningfully shift investors’ forecasts of the Federal Reserve’s monetary policy trajectory in 2023.

Markets are pricing in a 66% probability that the Fed will raise its benchmark interest rate by another 25 basis points to a range of 4.50% to 4.75% after its meeting on Feb. 1, according to the CME FedWatch tool. The central bank is expected to take its fed-funds rate target to 4.95% by June 2023, according to 30-day Fed Funds futures.

Meanwhile, China moved this week to lift quarantine and testing requirements for inbound passengers. Earlier this month, the country moved to ease domestic COVID restrictions, triggering a massive wave of infections across the country, which had been nearly virus-free for much of the pandemic due to rigid control measures. Investors were pondering the effects of China’s reopening on the global outlook for economic growth and inflation.

Read: Chinese are snapping up flights abroad as Beijing drops more travel restrictions

What are analysts saying

“While a full China reopening could provide a much-needed and timely boost to the global economy, it may come with unwelcome ambiguous strings attached. The good news is that inflation subsides as China reprises its role as a supplier of low-cost goods globally and supply chain bottlenecks ease,” said Stephen Innes, managing partner at SPI Asset Management.

“Still, the bad news is as growth accelerates through Q1, China’s insatiable demand for raw materials and all things energy will push up prices of those commodities, much of to the consternation of the Fed and ECB. Indeed, reopening is rekindling some inflationary spirits,” Innes added.

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