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Bond Report: Treasury yields advance by most in over a week as traders absorb latest Fed comments

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U.S. bond yields inched higher on Tuesday as traders assessed hawkish rhetoric from the Federal Reserve, yet finished November with monthly declines.

What happened

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.479%

advanced less than 1 basis point to 4.471%  from 4.469% on Monday.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.755%

rose 4.5 basis points to 3.746% from 3.701% as of Monday afternoon.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.806%

climbed 5.3 basis points to 3.801% from 3.748% late Monday.

For all of November, the 2- and 10-year yields posted their biggest one-month declines since July, based on 3 p.m. figures from Dow Jones Market Data. The 30-year rate ended November with its largest monthly drop since August 2019.

What drove markets

Benchmark U.S. government bond yields moved up on Tuesday as investors absorbed the latest hawkish comments from Federal Reserve officials who indicated that they’ll probably leave borrowing costs high for years to come.

St. Louis Fed President James Bullard said on Monday that the central bank will likely need to keep its benchmark interest rate above 5% for most of next year and into 2024 to cool inflation running not far from 40-year highs.

Markets are pricing in a 70% probability that the Fed will raise its policy rate by 50 basis points to a range of 4.25% to 4.5% on Dec. 14, and a 30% chance of another 75-basis-point hike, according to the CME FedWatch tool. The central bank is mostly expected to take its fed-funds rate target to at least 4.75% to 5% by March.

In U.S. economic data on Tuesday, the S&P Case-Shiller 20-city U.S. home price index dropped 1.2% in September, its third consecutive monthly decline, and a survey of consumer confidence touched its lowest level in four months in November.

Factors that helped to limit moves in yields included better news on inflation from Europe. The German 10-year bund yield
TMBMKDE-10Y,
1.923%

fell 7.2 basis points to 1.923% after data showed Germany’s annual rate of inflation decelerated in November.

In addition, investors have recently been considering the prospects of slowing global economic growth, stemming from Covid-19 lockdowns in China and Russia’s invasion of Ukraine. The Treasury curve remains at one of its most negative levels since 1981-1982.

Read: Most deeply inverted Treasury curve in more than 4 decades has one upbeat takeaway for investors

What analysts are saying

The deeper inversion of the 2s/10s spread “is somewhat of a mixed picture today for Fed policy makers,” said Mark E. Heppenstall, president and chief investment officer of Penn Mutual Asset Management in Horsham, Pa. “The Fed can’t love the rally in risk assets since longer-term Treasury rates peaked in mid/late October, but the inversion is a good sign for slower growth and inflation ahead.”

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