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Bond Report: Treasury yields move higher as China eases COVID curbs

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Treasury yields rose Monday amid signs of easing COVID restrictions in China and as traders continued to absorb a stronger-than-expected U.S. jobs report.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.316%

rose by less than 2.5 basis point to 4.317%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.517%

added 2.3 basis points to 3.517%.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.543%

was barely changed at 3.542%.

What’s driving markets

U.S. sovereign bond yields were nudging higher on Monday. Benchmark 10-year yields hit a 10-week trough last week after Federal Reserve Chair Jerome Powell all but confirmed that the central bank would slow the pace of rate rises as signs emerge inflation is slipping from recent 40-year highs.

However, a robust U.S. jobs report on Friday has called into question market expectations that the Fed will be able to stop raising borrowing cost by spring 2023 as it seeks to cool the economy.

In addition, news over the weekend that Beijing is easing COVID restrictions has raised hopes the Chinese economy can revive and help boost global growth. Faster economic growth tends to damp buying of sovereign debt.

Markets are pricing in a 79% probability that the Fed will raise interest rates 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 5.05% by May 2023, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Monday include the final November S&P U.S. services PMI, due at 9:45 a.m., followed at 10 a.m. by the ISM services index for November and the October factory orders. All times Eastern.

There will be no Fed speakers until after its policy-setting meeting on December 14.

What are analysts saying

“The market’s tendency to rally sharply in response to the slightest glimmer of hope of an easier Fed stance is a problem for the FOMC. The bond market’s overreaction to Chair Powell’s comments last week is another reason to think the Fed may have to tighten by more than currently implied by market rates,” said analysts at Wrightson ICAP in a note.

Jim Reid, strategist at Deutsche Bank wrote: “It’s fascinating that at the moment the market is focusing squarely on the very strong likelihood that we’ll ratchet down to ‘only’ a 50bps hike next week and extrapolating that level of dovishness rather than focus on any risks that the terminal rate could end up being nearer say 6% than 5%.”

“Indeed Larry Summers was doing the rounds over the weekend suggesting that markets were likely under-pricing terminal and seemingly being more comfortable suggesting a peak nearer 6 than 5%, even if he wasn’t specific over a particular number” Reid added.

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