Treasury yields advanced across the curve on Friday as data showed that a key gauge of U.S. inflation favored by policy makers rose sharply in September.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.375% rose to 4.363% from 4.321% on Thursday.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.968% advanced to 3.977% from 3.938% on Thursday afternoon.
- The yield on the 30-year Treasury TMUBMUSD30Y, 4.090% was little changed at 4.084% versus 4.093% on Thursday.
What’s driving markets
Data released on Friday showed that U.S. inflation is still running hot. A measure of the September PCE price index that strips out volatile food and energy costs rose a sharp 0.5%, matching Wall Street’s expectations. The PCE is regarded as the Fed’s preferred inflation indicator.
In other data, the employment cost index, increased 1.2% in the third quarter.
Friday’s rise in Treasury yields enabled the policy-sensitive 2-year rate to bounce off the two-week low it had reached on Thursday, as traders considered the possibility that the Fed might begin to slow the pace of interest-rate hikes soon.
On Friday, fed-funds futures traders factored in a 15.5% chance that policy makers might lift rates by a smaller-than-expected increment of 50 basis points next Wednesday, despite the 84.5% likelihood of another 75-basis-point hike instead. Traders also now see a better-than-not chance of the Fed shifting to a half-point increase in December.
What analysts are saying
“Markets have started to trade a Fed pivot again, but this pivot is defined as hiking in smaller increments, not as a ‘proper’ pivot from hikes to cuts,” said strategists at Citigroup. “U.S. rates will peak before equities bottom, but only when the Fed is almost done, not when it just slows down.”