10-year Treasury yields ease back amid thin week for data

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Benchmark bond yields were a touch softer on Wednesday amid a dearth of fresh catalysts.

What’s happening

The yield on the 2-year Treasury

was down 14 basis points to 4.219%, according to FactSet data. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury

retreated 1.3 basis points to 3.834%.
The yield on the 30-year Treasury

fell 3.3 basis points to 3.898%.

What’s driving markets

Action in U.S. Treasuries was muted as traders eyed the last few sessions of the year containing little in the way of major market-moving data.

Wednesday will see the November pending home sales index published at 10 a.m. Eastern. On Thursday, the weekly initial jobless claims will be released and Friday sees the Chicago PMI report.

Together, the reports are not expected to meaningfully shift investors’ forecasts of the Federal Reserve’s monetary policy trajectory in 2023.

Markets are pricing in a 66% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.95% by June 2023, according to 30-day Fed Funds futures.

The U.S. Treasury will auction $43 billion of 5-year notes on Wednesday.

There was some notable action ‘Down Under’, however, where Australian 10-year bond yields jumped 21 basis points to 4.049%, their highest in two months, as investors noted the economy would benefit from its exposure to China, as Beijing removes COVID-19 restrictions.

What are analysts saying

“While a full China reopening could provide a much-needed and timely boost to the global economy, it may come with unwelcome ambiguous strings attached. The good news is that inflation subsides as China reprises its role as a supplier of low-cost goods globally and supply chain bottlenecks ease,” said Stephen Innes, managing partner at SPI Asset Management.

“Still, the bad news is as growth accelerates through Q1, China’s insatiable demand for raw materials and all things energy will push up prices of those commodities, much of to the consternation of the Fed and ECB. Indeed, reopening is rekindling some inflationary spirits,” Innes added.

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