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Bond Report: Treasury yields slightly softer amid recession concerns

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Bond yields fell were fractionally lower as investors concerns about a slowing economy in 2023 lingered.

What’s happening
  • The yield on the 2-year Treasury
    TMUBMUSD02Y,
    4.349%

    slipped 1.7 basis points to 4.350%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury
    TMUBMUSD10Y,
    3.536%

    retreated less than 1 basis point to 3.530%.
  • The yield on the 30-year Treasury
    TMUBMUSD30Y,
    3.537%

    fell 1.1 basis points to 3.534%.
What’s driving markets

Benchmark 10-year Treasury yields were a fraction softer and holding just shy of their lowest levels in nearly three months, on lingering investor concerns that inflation-fighting rate hikes by the Federal Reserve could trigger a downturn.

The yield spread between 2-year and 10-year Treasuries sits at minus 82 basis points, near the widest since 1981. An inversion so great has always preceded a recession.

Despite recent sturdy economic data, which has raised short-term yields in anticipation of more Fed rate increases, Jamie Dimon, CEO of JPMorgan Chase, on Tuesday said the central bank’s tighter monetary policy will likely “cause a mild or hard recession” within “six to nine months”.

Markets are pricing in a 77% 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 4.95% by May 2023, according to 30-day Fed Funds futures.

U.S. economic updates set for release on Wednesday include third quarter productivity and unit labor costs at 8:30 a.m. and consumer credit for October at 3 p.m.. All times Eastern.

Ten-year German bund yields
TMBMKDE-10Y,
1.801%

fell 1.8 basis points to 1.785% after data showed the country’s industrial production declined in October.

Benchmark 10-year gilt yields
TMBMKGB-10Y,
3.088%

were little changed and at 3.080% were hovering just above three month lows after a survey from mortgage lender Halifax showed U.K. house prices falling in November at their fastest pace in 14 years.

What are analysts saying

“Later this week, there is the PPI and University of Michigan to watch out for on Friday. Inflation expectations in the University of Michigan will be interesting to see after the longer-term one rose to 3% from 2.9% in October,” said Jan Nevruzi, U.S. rates strategist at NatWest Capital Markets.

“Powell has used the University of Michigan numbers to justify Fed reaction earlier this hiking cycle, but to us that felt more of an ex-post justification of the hawkish path they took, rather than the reason for it. As far as the sentiment index, we see risks heading into next year towards the downside on recessions and unemployment concerns.”

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