A Period of Heightened Volatility Leads to a Dip in Treasury Yields

Tuesday morning witnessed a decline in Treasury yields spanning from the 2-year to the 30-year range, as the market aimed to stabilize following a period of significant volatility.

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Here's what's happening:

• The yield on the 2-year Treasury fell by 1.1 basis points, dropping to 4.928% from the 4.939% seen on Monday.
• The 10-year Treasury yield retreated by 6.4 basis points, falling to 4.598% from the 4.662% level observed on Monday afternoon.
• The 30-year Treasury yield dropped by 7.1 basis points, declining to 4.76% from the late Monday figure of 4.831%.

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What's driving market dynamics:The Treasury market is in the process of stabilizing after experiencing significant fluctuations in recent sessions. The notion that the Federal Reserve might have concluded its series of interest rate hikes led to a decline in the benchmark 10-year yield, which fell from a recent high of around 5% to 4.5% in just two weeks.

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This decline has raised questions about whether the Fed is relying excessively on higher long-term yields to tighten financial conditions, potentially as a substitute for raising interest rates.

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While the 10-year yield showed a slight rebound to nearly 4.67% on Monday, it experienced another minor decrease on Tuesday, though the movement was less pronounced.

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Overseas, the Reserve Bank of Australia delivered a reminder that central banks could readily reintroduce rate hikes if inflation remains persistent. They raised interest rates by 25 basis points to 4.35%, marking their first increase in months.

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In the U.S., market expectations indicate a 90.2% probability that the Fed will maintain interest rates at the 5.25%-5.50% range on December 13, as reported by the CME FedWatch tool. The likelihood of a 25-basis-point rate hike to a range of 5.50%-5.75% by the end of January stands at 14.8%.

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In U.S. economic data released on Tuesday, the trade deficit expanded by nearly 5% in September, reaching $61.5 billion, although it remained near a three-year low.

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Furthermore, Minneapolis Fed President Neel Kashkari noted in a Bloomberg interview that officials have not discussed the criteria for implementing interest rate cuts.

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The Treasury is scheduled to conduct a $48 billion auction of 3-year notes at 1 p.m. Eastern time.