Longer dated Treasurys log biggest yield jump in a week as traders reassess steep declines seen a day before

Treasury yields climbed Wednesday, with the 10-year and 30-year yields increasing the most in about a week, as traders pulled back from the prior session’s aggressive round of buying.

What happened

The yield on the 2-year Treasury
BX:TMUBMUSD02Y
rose 10.1 basis points to 4.914% from 4.813% on Tuesday.
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
gained 9.5 basis points to 4.535% from 4.440% Tuesday afternoon.
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
climbed 7.2 basis points to 4.691% from 4.619% late Tuesday.
On Wednesday, 10- and 30-year yields jumped the most since Nov. 9, according to Dow Jones Market Data.

What drove markets

Participants in the Treasury market viewed Tuesday’s session as a bit overextended and returned on Wednesday to see some “profit-taking going on” ahead of a $16 billion 20-year auction tomorrow, according to Tom di Galoma, co-head of global rates trading for BTIG in New York.

Economic data released on Wednesday showed that producer prices fell 0.5% for October, the largest decline since April 2020. That report came a day after inflation based on the U.S. consumer-price index for last month was weaker than expected.

In addition, retail sales fell for the first time in seven months, or by 0.1% for October. It was the first negative reading since March, the government reported. The New York Fed’s Empire State business conditions index, a gauge of manufacturing activity in the state, also rose to its highest level since April, the regional Fed bank said Wednesday.

Traders were pricing in a 100% probability that the Fed will leave interest rates unchanged between 5.25%-5.5% on Dec. 13, according to the CME FedWatch Tool. The chance of a 25-basis-point rate cut by May was seen at 44.6%, up from 32.1% a month ago.

What analysts said

“If the economy contracts early in 2024, we expect the Fed is likely to cut its short-term interest rate target in order to support the economy,” said Wells Fargo Investment Institute’s global strategy team, in an outlook published Wednesday. Yet, the Fed’s “higher-for-longer” warning on the likely path of interest rates has led the team to increase its year-end 2024 target for the 10-year Treasury yield to a 4.75% to 5.25% range, from a prior 3.75%-4.25% forecast.

“Inflation crosswinds over the next couple of months could contribute to market turbulence in the near term, but our view remains that by spring or summer, inflation will have fallen far enough for the Fed to consider a first rate cut — a supportive move for both bonds and stocks,” said Solita Marcelli, chief investment officer of the Americas for UBS Global Wealth Management. “This supports our expectations for positive returns for both quality fixed income and equities over the next six to 12 months, making it a good time to add to diversified balanced portfolios.”

—Jamie Chisholm contributed reporting

Read the full article here