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


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

What’s happening

The yield on the 2-year Treasury

rose to 4.321% from 4.278% on Friday.

The yield on the 10-year Treasury

advanced to 3.564% from 3.502% as of Friday afternoon.

The yield on the 30-year Treasury

was 3.6%, up from 3.559% late Friday.

What’s driving markets

U.S. bond yields nudged higher on Monday, following weekend news that Beijing was easing COVID restrictions — raising hopes that a revived Chinese economy can help boost global growth. Faster economic growth tends to damp buying of sovereign debt.

A robust U.S. November jobs report on Friday, which showed employers added 263,000 jobs, has called into question market expectations that the Federal Reserve will be able to stop raising borrowing costs by spring 2023.

Markets are pricing in a 74.7% probability that the Fed will raise its policy interest rate by another 50 basis points to a range of 4.25% to 4.5% on Dec. 14, according to the CME FedWatch tool. The central bank is also mostly expected to take its fed-funds rate target to at least 5% to 5.25% by May, according to 30-day Fed Funds futures.

In Monday’s data releases, U.S. factory orders rose 1% in October, beating the 0.7% gain that had been expected by economists surveyed by The Wall Street Journal, while an ISM barometer of U.S. business conditions rose to 56.5% in November, a strong showing that signals the economy is still expanding at a steady pace.

There will be no Fed speakers until after its policy-setting meeting on Dec. 13-14. Benchmark 10-year yields hit a 10-week low on Dec. 1 after Federal Reserve Chairman Jerome Powell all but confirmed that the central bank would slow the pace of interest rate increases soon as signs emerge that inflation is easing from recent 40-year highs.

What are analysts saying

“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%,” said a team at Deutsche Bank led by Jim Reid.

“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,” the team said.

Economic Report: The U.S. economy is still growing, report finds, even as warning signs mount

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