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Bond Report: Treasury yields rack up biggest weekly declines in months as Fed’s next meeting looms

Two-, 10- and 30-year Treasury yields finished the New York session higher on Friday, but had their biggest weekly declines in at least three months as traders considered the possibility that policy makers might back off aggressive rate hikes by year-end.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.408%

jumped 10.1 basis points to 4.422% from 4.321% on Thursday. Nonetheless, it dropped 6.7 basis points for the week, the largest weekly decline since the period that ended July 29, based on 3 p.m. figures from Dow Jones Market Data.

The yield on the 10-year Treasury
TMUBMUSD10Y,
4.010%

advanced 7.1 basis points to 4.009% from 3.938% on Thursday afternoon. For the week, it dropped 20.3 basis points, the largest weekly decline since the period that ended July 1.

The yield on the 30-year Treasury
TMUBMUSD30Y,
4.137%

rose 3.5 basis points to 4.128% from 4.093% on Thursday. For the week, it fell 17.5 basis points, the biggest weekly decline since the period that ended April 1.

What’s driving markets

Data released on Friday showed that U.S. inflation is still running hot. A measure of the September PCE price index that strips out volatile food and energy costs rose a sharp 0.5%, matching Wall Street’s expectations. The PCE is regarded as the Fed’s preferred inflation indicator.

Treasury yields spiked on Friday, led by a jump in 3-month to 1-year rates, which are particularly sensitive to the near-term direction of Fed policy. Despite the hot inflation reading, traders continued to consider the possibility that the Federal Reserve might begin to slow the pace of its interest-rate hikes soon.

On Friday, fed-funds futures traders factored in a 15.5% chance that policy makers might surprise markets next Wednesday with a smaller-than-expected rate hike of 50 basis points, despite an 84.5% likelihood of another 75-basis-point move. Traders see a better-than-50% implied chance of a 50-basis-point move in December, according to the CME FedWatch Tool.

In other data, consumer sentiment improved slightly in October, according to a University of Michigan’s gauge, and a decline in pending home sales gathered steam in September.

What analysts are saying

“The market is priced for a 75bp hike” at the November FOMC meeting “so the reaction will depend on the message in the statement and press conference. Investors will be focused on any hints about a potential deceleration in the pace of hikes,” said a team of strategists at TD Securities.

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