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Bond Report: 2- and 10-year Treasury yields hit two-week low as traders reassess Fed’s most likely path forward

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Most Treasury yields fell on Thursday, while rates on 3- and 6-month Treasury bills swung in both directions, as traders considered the possibility that central banks may be approaching the limit of their abilities to keep aggressively hiking interest rates.

What’s happening

The 3-month rate rose to around 4.029%, while the 6-month rate was just under 4.3% after switching between advances and declines through Thursday afternoon.

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.297%

declined 9.7 basis points to 4.321% from 4.418% on Wednesday.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.913%

fell 7.6 basis points to 3.938% from 4.014% as of Wednesday afternoon.

Thursday’s levels were the lowest for the 2- and 10-year rates since Oct. 12, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.070%

dropped 7 basis points to 4.093% from 4.163%. Thursday’s level was the lowest since Oct. 18.

What’s driving markets

Most Treasury yields slid on Thursday as investors and traders continued to reassess the likelihood of aggressive rate hikes by the Fed through year-end and into 2023. Trading in 3- and 6-month bills was especially volatile throughout the session.

Read: Market expectations start to shift in direction of slower pace of rate hikes by Fed

Traders were increasingly factoring in some chance that the Fed and other central banks may be near the end of the road with aggressive 75-basis-point rate hikes. That view was supported by a report last week in The Wall Street Journal, which indicated policy makers are open to a debate about the size of December’s rate hike; by a smaller-than-expected rate hike by the Bank of Canada on Wednesday; and by what observers perceived to be a dovish tone in the European Central Bank’s rate outlook.

On Thursday, the ECB, which started tightening later than many of its peers, raised its deposit rate by 75 basis points, or three-quarters of a percentage point, to 1.5%. Nonetheless, the German 10-year bund yield
TMBMKDE-10Y,
1.962%
,
the bloc’s benchmark, slipped 15.4 basis points to 1.962%.

Markets are pricing in an 87% probability that the Fed will raise interest rates by another 75 basis points to a range between 3.75% and 4% on Nov. 2 — down from a 98% chance seen a week ago. Meanwhile, the likelihood of a smaller-than-expected 50-basis-point hike next week rose to almost 13%, up from 1.6% on Oct. 20, according to the CME FedWatch Tool.

Data released on Thursday showed that the U.S. economy grew 2.6% in the third quarter, initial jobless claims ticked up by 3,000 to 217,000 for the week that ended Oct. 22, and durable goods rose 0.4% in September.

What analysts are saying

“Central banks are starting to reach their limit on how much tightening they can actually do,” said Tom di Galoma, managing director of rates trading at Seaport Global Holdings in Greenwich, Conn. “Yields in the U.S., the U.K., and Germany might have peaked to the point where we’re not going to see a further selloff that pushes rates higher. It’s all dependent on inflation, but my thought is that rates are now at levels where central banks feel they need to slow down,” he said via phone.

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