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Bond Report: Treasury yields edge lower New Year’s Eve, with 10-year near 1.5% in largest yearly rise since 2013

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U.S. Treasury yields edged lower in the final session of the year, finding some support amid renewed jitters about the rapid spread of omicron, even if evidence shows that the latest strain of the virus that causes COVID-19 produces milder symptoms.

The bond market closed an hour early on Friday in observance of the New Year’s Day holiday, but other markets observe regular trading hours.

What are yields doing?
  • The 10-year Treasury note TMUBMUSD10Y, 1.513% yields 1.496%, down from 1.514% on Thursday at 3 p.m. Eastern Time.
  • The 30-year Treasury bond TMUBMUSD30Y, 1.906% was at 1.888%, retreating from 1.924% a day ago.
  • The 2-year Treasury note yield TMUBMUSD02Y, 0.730% was at 0.730%, off from 0.738% on Thursday afternoon.
  • For the month, the quarter and the year, the 2-year Treasury note is up 20.6 basis points, up 44.1 basis over the past three months, and 61.1 basis points in 2021; the 10-year Treasury is up 5.6 basis points in December, down 3.2 basis points on the quarter and up 58.3 basis points in the year to date.
  • The 10-year rate sees it’s largest yearly gain since 2013, while the 30-year yield has largest annual advance since 2018.
  • It is the 2-year note’s largest annual yield rise since 2017, its largest quarterly gain since 2008 and its largest monthly rise since 2018.
What’s driving the market?

Bond yields slipped on Friday, in the final trading day of the year, with the market facing thin volumes due to the New Year’s holiday.

Yields have risen over the course of 2021 as investors attempted to gauge the durability and intensity of inflation, which has been sparked by COVID-inspired supply-chain bottlenecks and labor shortages, combined with a surge in demand spurred by fiscal stimulus.

At least one analyst is predicting that next year the yield on the benchmark 10-year Treasury will climb only modestly in 2022, ending the year in a range of 1.75% to 2%, according to Lawrence Gillum, fixed-income strategist at LPL Financial.

However, predicting yields over the past several years has proved to be a fool’s errand and it is unclear in 2022 how the Federal Reserve will combat inflation.

ReadA 10-year Treasury yield at or above 2% has been elusive. Here are the banks making it their 2022 call.

At its mid December meeting, the Fed staged what has been described as a hawkish pivot, hastening the wind down of its monthly bond purchases, with the goal to end the program by March, before commencing what markets estimate will be three benchmark interest rate hikes in 2022. The Fed will next meet on Jan. 25-26.

On Friday, concerns about the virus were reminding investors of the challenges facing Wall Street next year. COVID infections are rising in parts of the world. The seven-day average of new cases in the U.S. has risen to 344,543 on Thursday, up from 301,477 on Wednesday.

There was no U.S. economic data on Friday, but next week market participants will be looking toward a manufacturing report from the Institute for Supply Management and minutes from the Fed’s December meeting.

What strategists are saying

“Looking ahead to 2022, yields remain front and center. We’d expect to see 10-year yields break free from the tight range they’ve been trapped in during the early part in the new year and we’re still in the camp that thinks they breakout higher,” wrote Jeff deGraff, analyst at Renaissance Macro Research.

“With few new trading clues to start next week, it may take several trading days to kick start the typical January trading machine,” Jim Vogel, interest-rate strategist at FHN Financial, wrote in a Friday note. “Every data release for December was measured before Omicron cases exploded.”

Market Snapshot: U.S. stock indexes trade mixed Friday afternoon, with the S&P 500 little changed on New Year’s Eve

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