The Treasury Yields Rose in Shortened Trading After Thanksgiving

Treasury yields faced downward pressure in a shortened day of trading on Friday, reflecting a selloff in European bonds. Investors are growing increasingly concerned about interest rates and government borrowing needs, prompting shifts in the bond market landscape.

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The 2-year Treasury yield (BX:TMUBMUSD02Y) increased by 4.2 basis points to reach 4.938%, following a prior rise of 2.7 basis points on Wednesday, bringing it to 4.908%. The 10-year Treasury yield (BX:TMUBMUSD10Y) climbed 6.3 basis points to 4.475%, while ahead of the Thanksgiving holiday, it had experienced a minor slip of less than 1 basis point to conclude at 4.415%. This marked a five-day streak of declines, the lengthiest since April 5, according to Dow Jones Market Data. Similarly, the 30-year Treasury yield (BX:TMUBMUSD30Y) saw an increase of 6.1 basis points, reaching 4.603%, after a 3.2 basis point decline on Wednesday, the most significant single-day drop since Nov. 16.

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The Thanksgiving holiday resulted in U.S. bond markets closing on Thursday, and a scheduled early finish on Friday at 2 p.m., as per the trade group Sifma's recommendation for fixed-income markets.

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Richard Flax, Chief Investment Officer at Moneyfarm, noted the recent decline in yields and characterized Friday as a temporary pause. He highlighted a divergence between resilient hard macro data and weaker sentiment indicators, posing the question of how this disparity will be resolved. The uncertainty lies in whether sentiment indicators will improve alongside a still robust macro environment or if the hard data will begin to weaken under the impact of higher rates.

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As the U.S. took a break, Europe took center stage, with the German 10-year bund yield (BX:TMBMKDE-10Y) experiencing an uptick on Thursday following a stronger-than-expected preliminary composite purchasing managers index for October. The benchmark bund yield continued its rise on Friday, gaining 1.8 basis points to reach 2.639%, in sync with the upward movement in U.S. bond yields.

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Several factors were attributed to the climbing bund yields. German Finance Minister Christian Lindner proposed a supplementary budget for the year and suggested another suspension of limits on new borrowing. Last week, Germany’s federal constitutional court hindered the government from utilizing €60 billion in untapped borrowing capacity for its climate fund.

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The energy crisis post-pandemic has taken a toll on Germany, prompting the need for funds when money becomes scarce and expensive, according to Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank. Friday's data confirmed that Germany's economy contracted by 0.1% from July to September, potentially indicating a recession.

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While the U.S. economy seems resilient despite the Federal Reserve's interest rate increases, Europe continues to grapple with economic challenges following similar rate hikes by the European Central Bank to combat inflation.

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On the economic data front in the U.S., Friday was relatively quiet, with the S&P flash U.S. services and manufacturing purchasing managers indexes scheduled for 9:45 a.m. Next week, investors anticipate the release of the Fed's preferred inflation gauge, the personal-consumption expenditures index for October.

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Market expectations currently indicate a 99.5% probability that the Federal Reserve will maintain interest rates within the range of 5.25% to 5.50% after its next two meetings on Dec. 13 and Jan. 31, according to the CME FedWatch tool.

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