Treasury yields rose by the most in roughly two weeks or more on Monday as traders considered a slight chance of another Federal Reserve rate hike by January.
What happened
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
rose 11.1 basis points to 4.939% from 4.828% on Friday. Yields move in the opposite direction to prices. The yield is up four of the past six trading sessions. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
climbed 10.5 basis points to 4.662% from 4.557% on Friday. -
The yield on the 30-year Treasury
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jumped 8.1 basis points to 4.831% from 4.750% on Friday. - Monday’s moves were the biggest one-day jumps for Treasury yields in almost two or three weeks.
What drove markets
Government bond yields jumped on Monday as traders and economists considered the potential for more action from the Federal Reserve early next year.
Economists at U.K. bank Barclays, one of the primary dealers for U.S. Treasurys, pushed back their call for a Fed rate hike to January. Meanwhile, fed funds futures traders put a 17.1% chance on either a quarter-point or half-point hike occurring by the first month of next year.
The weekly drop in Treasury yields seen through last Friday has worked against the central bank, leaving officials in a “circularity loop” that undermines its ability to formulate policy based on tightened conditions, according to Barclays.
Read: The Fed wanted the bond market’s help in fighting inflation. Is it backfiring?
On Monday, Fed Governor Lisa Cook said that households, businesses and banks are in pretty good financial health and don’t appear to pose a big threat to the U.S. economy. Meanwhile, the central bank’s senior loan officer survey found that banks continued to tighten standards for borrowing by businesses in the third quarter.
What analysts are saying
Besides Powell, other factors that played a role in last week’s drop in yields was softer-than-expected data on October payrolls and from the Institute for Supply Management, as well as lower-than-expected fourth-quarter borrowing needs from the Treasury, according to Rob Daly, director of fixed income for Glenmede Investment Management in Philadelphia.
If financial conditions continue to loosen, Fed officials “would need to be on the front foot to raise rates,” Daly said via phone. “They could raise rates in December if conditions look loose and it’s the right thing to do, but I think it’s more of a January scenario.”
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