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Bond Report: Treasury yields mixed as strong economic data presents challenge for Fed

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U.S. bond yields were mixed on Tuesday after jumping in the previous few sessions following robust economic data.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.370%

rose 4.1 basis points to 4.375%.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.547%

retreated less than 1 basis point to 3.578%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.552%

rose 1 basis point to 3.595%.

What’s driving markets

Treasury yields were mixed after bouncing over the past two trading days in response to signs the U.S. economy remains in decent condition.

Two-year U.S. government bond yields, which are particularly sensitive to monetary policy moves, are up more than 15 basis points from their Friday lows after healthy jobs data that day was followed up on Monday by a better-than-expected survey of service sector activity.

Together the reports raised fears that the Federal Reserve may need to continue increasing borrowing costs for longer, even as it slows the pace of interest rate hikes.

Markets are pricing in a 79.4% probability that the Fed will its policy interest rate by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 5.0% by June 2023, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Tuesday include the international trade deficit for October, due at 8:30 a.m. Eastern. There are no Fed officials due to speak as the central bank is making no comment until after next week’s FOMC meeting.

What are analysts saying

“A snapshot from the services industry showed consumer resilience was strong. This has fueled speculation that the U.S. central bank will have to be more Scrooge-like and make borrowing even more expensive to rein in inflation,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

“Companies still appear to be dealing with pent-up demand with the ISM reading showing the services sector is expanding merrily. With central bank policies so far having meagre impact on the jobs market, the chances of a 0.75% rate hike being announced on the 14th are now considered to be higher. The potential effect of another rapid tightening round has led to jitters about repercussions for the global economy,” Streeter added.

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