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Bond Report: 2-year Treasury yield jumps to 4.3% after November jobs data but finishes week lower

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The policy-sensitive 2-year Treasury yield advanced on Friday, though finished the week lower, after a hotter-than-expected U.S. jobs report for November prompted traders to push up the likelihood of a 5% or higher fed-funds rate by March.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.292%

rose 2.4 basis points to  4.278% from 4.254% on Thursday. It still declined 20.1 basis points this week, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.493%

slipped 2.3 basis points to 3.502%  from 3.525% as of late Thursday. The 10-year yield declined 19.9 basis points this week.

Those were the biggest weekly declines for the 2- and 10-year rates since the period that ended on Nov. 10.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.539%

fell 7.4 basis points to 3.559% from 3.633%. It declined 19.2 basis points this week, the biggest weekly decline since the period that ended June 12, 2020. 

What drove markets

Two-year yields jumped on Friday after November’s nonfarm payroll report showed the U.S. added 263,000 jobs, exceeding the 200,000 new jobs that economists had expected. The unemployment rate was unchanged at 3.7%, while average hourly wages rose 0.6% to $32.82 an hour. Job gains for the prior two months were also revised higher.

Friday’s data put the prospects of another jumbo-size rate hike back on the table for the Fed’s Dec. 13-14 meeting, and had some analysts speculating about the possibility that rates may need to go up even more in 2023 than previously thought.

Fed-funds traders boosted the likelihood that the Fed’s main policy rate target will go to 5% or above by March, up from a current level between 3.75% and 4%. Those chances rose to as high as 43% on Friday, up from almost 31% on Thursday.

What analysts are saying

“Nonfarm payrolls at 263,000 came in ahead of expectations, with the gains further underlined by upward revisions in the prior two months,” said Jason Pride, chief investment officer of private wealth at Glenmede. In other words, the report was “hotter than expected.”

“While the Fed may slow down its rate increases from the 0.75% per meeting pace to 0.50% per meeting pace, it may also place pressure on them to extend those rate increases further into 2023,” Pride said. “Such a path to higher rates for longer should put a damper on both fixed income and equity markets.”

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