Bond Report: Treasury yields fall as investors watch oil market for U.S. recession signals


U.S. bond yields fell Wednesday as investors worry about the potential for the U.S. economy to slow more than anticipated in 2023.

What’s happening

The yield on the 2-year Treasury

slipped 9 basis points to 4.27%.

The yield on the 10-year Treasury

retreated 7 basis point to 3.45%.

The yield on the 30-year Treasury

fell 7 basis points to 3.45%.

What’s driving markets

The benchmark 10-year Treasury yield was falling Wednesday, trading near the lowest level in nearly three months, on investor concerns that inflation-fighting interest rate hikes by the Federal Reserve could trigger a sharper downturn than anticipated.

The yield spread between 2-year and 10-year Treasuries sits at minus 81 basis points, near the widest since 1981. An inversion so great has usually preceded a recession.

The focus was also on oil futures Wednesday, after West Texas Intermediate crude for January


delivery fell below $73 a barrel, after trading as low as $72.42 — the lowest intraday level since December 2021, FactSet data show.

On the economic front, a U.S. productivity report showed weaker output but accelerating labor costs, the Labor Department said on Wednesday. Unit labor costs, the price of labor per single unit of output, climbed by a smaller 2.4% annual pace in the third quarter, compared with the preliminary 3.5% increase.

Jamie Dimon, CEO of JPMorgan Chase, on Tuesday said the U.S. central bank’s tighter monetary policy will likely “cause a mild or hard recession” within “six to nine months”.

Markets are pricing in a 77% probability that the Fed will raise 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 4.95% by May 2023, according to 30-day Fed Funds futures.

The Bank of Canada on Wednesday raised its key rate by 50 basis points to 3.75% to 4.25%, the highest level in nearly 15 years, but didn’t hint at the size of its next rate increase.

What are analysts saying

“Bonds are mesmerized by the fact that oil can’t hold a rally,” said Jim, Vogel, a fixed income strategist at FHN Financial, in a phone interview with MarketWatch. The trend raises questions about whether traders in the oil complex “see something wrong with the economy” that economists and the Federal Reserve don’t.

“Later this week, there is the PPI and University of Michigan to watch out for on Friday. Inflation expectations in the University of Michigan will be interesting to see after the longer-term one rose to 3% from 2.9% in October,” said Jan Nevruzi, U.S. rates strategist at NatWest Capital Markets.

“Powell has used the University of Michigan numbers to justify Fed reaction earlier this hiking cycle, but to us that felt more of an ex-post justification of the hawkish path they took, rather than the reason for it. As far as the sentiment index, we see risks heading into next year towards the downside on recessions and unemployment concerns.”

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