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Treasury yields advanced across the curve on Friday as data showed that a key gauge of U.S. inflation favored by policy makers rose sharply in September.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.375%
rose to 4.363% from 4.321% on Thursday. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.964%
advanced to 3.977% from 3.938% on Thursday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
4.088%
was little changed at 4.084% versus 4.093% on Thursday.
What’s driving markets
Data released on Friday showed that U.S. inflation is still running hot. A measure of the September PCE price index that strips out volatile food and energy costs rose a sharp 0.5%, matching Wall Street’s expectations. The PCE is regarded as the Fed’s preferred inflation indicator.
In other data, the employment cost index, increased 1.2% in the third quarter.
Friday’s rise in Treasury yields enabled the policy-sensitive 2-year rate to bounce off the two-week low it had reached on Thursday, as traders considered the possibility that the Fed might begin to slow the pace of interest-rate hikes soon.
On Friday, fed-funds futures traders factored in a 15.5% chance that policy makers might lift rates by a smaller-than-expected increment of 50 basis points next Wednesday, despite the 84.5% likelihood of another 75-basis-point hike instead. Traders also now see a better-than-not chance of the Fed shifting to a half-point increase in December.
What analysts are saying
“Markets have started to trade a Fed pivot again, but this pivot is defined as hiking in smaller increments, not as a ‘proper’ pivot from hikes to cuts,” said strategists at Citigroup. “U.S. rates will peak before equities bottom, but only when the Fed is almost done, not when it just slows down.”
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