Bond Report: Benchmark Treasury yields firm but near recent lows on slowdown fears.

by | Dec 19, 2022 | Stock Market

Longer-term bond yields rose on Monday, but remain near 3-month lows as investors continue to fret about a global economic slowdown.What’s happening
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.224%
fell 2.6 basis points to 4.178%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.566%
added 4 basis points to 3.529%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.635%
rose 4.9 basis points to 3.594%.

What’s driving markets The benchmark 10-year Treasury yield is inching up on Monday, but remains about 70 basis points below the cycle high hit in October, a decline that reflects concerns the Federal Reserve’s sharp interest rate hikes to combat inflation will push the U.S. economy into recession.

The Fed raised rates by 50 basis points last week to a range of 4.25% to 4.5% and officials at the central bank have made clear they think borrowing costs may have to stay higher for longer than many in the market think. There was tough talk too on rate rises from the European Central Bank last week, which also raised rates by 50 basis points. Investors seem not to have taken the Fed at its word, however, and since last week’s comments from chairman Jay Powell, they are betting on a lower “terminal rate” for borrowing costs in this cycle, believing the damage to the economy has already been done. Markets are pricing in a 74% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. But now the central bank is expected to take its Fed funds rate target to 4.83% by May 2023, according to 30-day Fed Funds futures. A few weeks ago that terminal rate was a fraction above 5%. This is reflected in the 2-year Treasury yield, which is more sensitive to Fed policy, dipping on Monday, while longer duration bond yields inch up off recent lows. U.S. economic updates set for release on Monday include the …

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