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Bond Report: 2-year Treasury yield sees biggest weekly rise in a month as investor unease deepens

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Most Treasury yields finished lower Friday but ended higher for the week as investor unease grew ahead of an expected interest rate increase by the Federal Reserve next week.

The 2-year yield notched its biggest one-week gain in a month. Meanwhile, the 30-year yield was one of the few maturities to advance for the day, hitting its highest level in more than eight years.

What yields are doing

The yield on the 2-year Treasury note 
TMUBMUSD02Y,
3.867%

fell 1.2 basis points to 3.859% from 3.871% on Thursday. It rose 29 basis points this week, the largest weekly gain since Aug. 5, based on 3 p.m. yields, according to Dow Jones Market Data.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.455%

was down 1.1 basis points at 3.447% versus 3.458% on Thursday. It rose 12.6 basis points this week for the seventh straight weekly gain.

The 30-year Treasury bond yield
TMUBMUSD30Y,
3.520%

rose 3.9 basis points to 3.518% from 3.479% late Thursday. That’s the highest level since April 21, 2014. It rose 6.2 basis points this week, the third straight week of gains.

What drove the market?

Traders are bracing for next week’s Federal Reserve meeting where some see a slight chance of a 100 basis point increase in the benchmark policy rate, following a hotter-than expected U.S. inflation report for August on Tuesday that sent stocks to their worst one-day performance since June 2020.

Fresh economic gloom came from FedEx Corp. 
FDX,
-21.40%
,
after the global shipper withdrew its annual outlook late Thursday and forecast sharply lower quarterly profit and revenue. FedEx’s warning weighed on the broader stock market, with major indexes all lower in the final hour of trading.

Read: ‘Simply staggering.’ FedEx hit with downgrades, price target cuts as warning shocks Wall Street.

Fed funds futures traders are pricing in a 16% chance of a jumbo-size hike of 100 basis points, or a full percentage point, and an 84% chance of a 75-basis-point increase in the fed funds rate target, which currently sits between 2.25% and 2.5%. Deutsche Bank, Wall Street’s most pessimistic bank, say it expects the fed funds rate to get to 4.9% by 2023’s first quarter and pioneering yield-curve researcher Campbell Harvey said one of the Treasury market’s most reliable recessionary indicators could turn “code red” on next week’s Fed rate hike.

In data on Friday, the University of Michigan’s consumer sentiment index climbed to a five-month high in September, while 5-year inflation expectations slipped to 2.8% from 2.9%.

What strategists are saying

“All else being equal, we continue to see upward pressure on front-end yields as the Fed’s next hike quickly approaches,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “Unsurprisingly, 2s/10s has continued to drift lower, reaching -45 bp overnight and very quickly putting the cycle extreme of -58 bp into range. The depths of the inversion will be tested in the near term and a -75 bp target remains our base case as the 2-year sector adjusts to the potential for another 75 bp hike in November and the Fed’s updated terminal rate forecasts.”

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