Treasury Yields Jump, Taking Back Some of Last Week’s Declines

On Monday morning, Treasurys experienced a sell-off, resulting in elevated yields, as investors continued to assess the impact of Federal Reserve Chairman Jerome Powell's efforts last week to temper expectations of imminent rate cuts.

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The yield on the 2-year Treasury note (BX:TMUBMUSD02Y) surged by 7.7 basis points, reaching 4.642% from the previous 4.565% on Friday, which marked the lowest level since June 8, as reported by Dow Jones Market Data. Notably, it concluded the week with a substantial decline of 39.2 basis points, marking the most significant drop since March.

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Simultaneously, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) increased by 4 basis points, settling at 4.265% from Friday's 4.225%, the lowest level observed since September 1. Over the course of the previous week, the 10-year rate experienced a noteworthy drop of 25.8 basis points.

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The 30-year Treasury yield (BX:TMUBMUSD30Y) rose by 1.5 basis points to 4.432% from Friday's 4.417%, the lowest since September 20. Despite this uptick, it had witnessed a decline of 20 basis points throughout the previous week.

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The downward trajectory of Treasury yields persisted last week, even following Powell's efforts to dispel expectations of a rate cut in 2024, affirming the central bank's readiness to tighten policy if necessary. November witnessed the most substantial monthly declines in 10- and 30-year yields since August 2019, fueled by optimism that receding inflation would pave the way for the Federal Reserve to consider a shift towards rate cuts.

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Investors are eagerly awaiting the release of November's nonfarm payroll data on Friday to discern whether it aligns with the argument for the Fed to lower interest rates. Notably, manufacturing data disclosed last Friday indicated a sustained contraction in activity.

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Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, commented on the macroeconomic landscape, emphasizing that recent data reinforces the perception of the U.S. economy entering a soft landing. Inflation is seen declining towards the Fed's target, even as a fully employed economy thrives due to robust domestic demand. Despite the drop in medium-term rates and the dollar, Ryan expressed skepticism, deeming it too optimistic. He argued that an economy exceeding its potential growth and a robust labor market do not justify anticipations of interest rate cuts in the near term.

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In summary, the Treasury sell-off and the subsequent rise in yields reflect the ongoing assessment by investors of Powell's statements and the broader economic data. The anticipation of the Fed's stance on interest rates, particularly in light of employment and manufacturing indicators, remains a pivotal factor shaping market dynamics and investor sentiment.