Bond yields recovered early declines as traders weighed worries about a COVID-19 lockdown in China against fears the Fed remains determined to tighten policy agressively.
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.522% inched up 1.7 basis points to 4.531%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.831% added 1.5 basis points to 3.842%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.916% was barely changed at 3.915%.
What’s driving markets
Benchmark bond yields were slightly firmer on Monday as concerns about further Federal Reserve rate hikes overshadowed worries that more COVID-19 lockdowns in China will damage the global economy.
Yields initially fell in Asian and early European action as traders bought bonds after reports Beijing would restrict activity in the southern Chinese metropolis of Guangzhou. News that German producer price inflation fell 4.2% in October, against forecasts for a month-on-month gain of 0.9%, added to demand for sovereign debt.
However, despite comments over the weekend from Atlanta Fed President Raphael Bostic saying he favored slowing the pace of interest rate rises, investors remained wary of further aggressive tightening by the U.S. central bank.
Markets are pricing in a 76% probability that the Fed will raise interest rates 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 5.1% by June 2023, according to 30-day Fed Funds futures.
The Fed will release the minutes of its most recent rate-setting meeting on Wednesday.
What are analysts saying
“[The] worry is the Fed minutes which could put pivot expectations in a hawkish wrapper. And given Bullard’s comments from last week, I suspect the minutes will reflect the general agreement that the Fed funds rate may need to go higher than previously assumed,” said Stephen Innes, managing partner at SPI Asset Management.