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Two- through 30-year Treasury yields fell Tuesday morning as the market looked to settle following a period of marked volatility.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell 1.1 basis points to 4.928% from 4.939% on Monday. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
retreated 6.4 basis points to 4.598% from 4.662% Monday afternoon. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
dropped 7.1 basis points to 4.76% from 4.831% late Monday.
What’s driving markets
The Treasury market is striving to stabilize after notable volatility in recent sessions. Hopes that the Federal Reserve may have finished increasing interest rates caused the benchmark 10-year yield to drop from a cycle high around 5% to 4.5% in about two weeks.
That decline is raising questions about whether the Fed is relying too much on higher long-term yields to do the job of tightening financial conditions, as a possible substitute for a rate hike.
Read: The Fed wanted the bond market’s help in fighting inflation. Is it backfiring?
After a pop back up to almost 4.67% on Monday, the 10-year yield nudged lower again on Tuesday, albeit with a less sizable move.
A reminder for investors that central banks could readily revive rate hikes if inflation proves sticky came from overseas on Tuesday, when the Reserve Bank of Australia lifted interest rates by 25 basis points to 4.35%, its first increase in months.
Back in the U.S., markets are pricing in a 90.2% probability that the Fed will leave interest rates unchanged at 5.25%-5.50% on Dec. 13, according to the CME FedWatch tool. The chance of a 25-basis-point rate hike to a range of 5.50%-5.75% by the end of January is seen at 14.8%.
In U.S. economic data released on Tuesday, the trade deficit climbed almost 5% in September to $61.5 billion, but remained near a three-year low.
Meanwhile, Minneapolis Fed President Neel Kashkari, in an interview on Bloomberg, said that officials have not discussed what it would take to cut interest rates.
The Treasury will auction $48 billion of 3-year notes at 1 p.m. Eastern time.
What analysts are saying
“Lower bond yields enabled stocks to bounce back strongly in the second half of last week, aided by some less hawkish Fed commentary after the meeting and a softer jobs report. But with yields now stabilizing again, equities are also running low on energy and may require another boost from the data or central bank,” said Craig Erlam, a senior market analyst for OANDA Corp.
“But Fed officials remain extremely cautious, fearing stopping too soon and suffering another onslaught of criticism for underestimating the inflationary pressures. And we’re seeing that again, with Kashkari claiming it’s too soon to declare victory and that doing too much is preferable to too little.”
