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Bond Report: Treasury yields rise as Fed’s favorite inflation gauge stays well above 2% target

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Treasury yields rose Friday, following this week’s substantial flattening of the curve, with data showing U.S. consumer spending rose for September and the Federal Reserve’s favored inflation gauge holding well above the central bank’s 2% target last month.

What are yields doing?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.583%

    rose to 1.604%, compared with 1.568% at 3 p.m. Eastern on Thursday.
  • The 2-year Treasury note yield
    TMUBMUSD02Y,
    0.532%

    rose to 0.533%, compared with 0.499% Thursday afternoon. Through Thursday, the 2-year yield had risen 21 basis points in October, on track for its largest monthly rise since April 2018, based on 3 p.m. levels, according to Dow Jones Market Data.
  • The 30-year Treasury bond yield
    TMUBMUSD30Y,
    1.946%

    was up at 1.979% versus 1.962% on Thursday.
What’s driving the market?

Data released Friday showed that U.S. consumer spending rose 0.6% in September as Americans dipped into their savings, a gain that was in line with forecasts of economists surveyed by The Wall Street Journal. Meanwhile, personal income slumped 1% in September, versus the 0.4% decline that economists were looking for, as pandemic-related assistance programs winded down.

The Federal Reserve’s favored inflation gauge held well above the central bank’s 2% target. The 12-month increase in the PCE index rose to 4.4% in September from 4.2% in the prior month. And the core PCE rate that strips out food and energy held steady at 3.6% on an annual basis.

Analysts were looking for end-of-month position squaring on Friday, as investors also await next week’s Federal Reserve policy meeting, which is widely expected to see policy makers unveil plans to begin scaling back monthly bond purchases.

Yield curves, which plot yields across maturities in government bonds, have flattened significantly around the world over recent days. Rising yields at the short end of the curve are tied to expectations that central banks across the world will be more aggressive than previously expected to address inflationary pressures.

Read: Bond market yield curve flattening continues as U.S. growth slows, while ECB’s Lagarde pushes back on rate-hike expectations

Meanwhile, a fall for yields at the long end of the curve earlier this week is seen by some market watchers as a sign investors are worried about long-term economic growth prospects. Others see a more benign interpretation as U.S. stock indexes continue to march to records, arguing that the yield moves indicate investors don’t think it will take much for central banks to tame near-term inflation pressures.

See: Stocks rise to records as markets seem ‘pretty convinced’ it won’t take much to tame inflation

What are analysts saying?

“Ahead of the data, the Treasury market was under modest pressure with 20s notably weak as the 20s/30s curve continues to invert,” said BMO Capital Markets strategist Ian Lyngen. “Since the release, we’ve seen a drift sideways in rates. From here, we’ll be watching for month-end rebalancing activity to be the most compelling driver of price action into the weekend.”

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