Treasury Yields Decline as a Result of U.S Data and Powell's Remarks

On Friday, Treasury yields sustained a downward trajectory, influenced by lackluster U.S. manufacturing-related data for November and the analysis of recent statements from Federal Reserve Chairman Jerome Powell.

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The 2-year Treasury yield (BX:TMUBMUSD02Y) stood at 4.605%, exhibiting an 11 basis points decline from the previous day's 4.715%. It even touched an intraday low, falling below 4.6% during the New York session. Conversely, the 10-year Treasury yield (BX:TMUBMUSD10Y) experienced a decrease of 7.7 basis points, settling at 4.272% compared to Thursday's 4.349%. The 30-year Treasury yield (BX:TMUBMUSD30Y) also saw a decline of 5.6 basis points, reaching 4.455% from its late Thursday figure of 4.511%. As a fundamental principle, yields move inversely to prices.

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The market's movement was notably influenced by soft U.S. manufacturing data released on Friday. S&P Global's final U.S. manufacturing PMI reading for November remained stagnant at 49.4, mirroring its preliminary reading. Simultaneously, the Institute for Supply Management's manufacturing index for the previous month also stayed unchanged at 46.7. These figures, below the 50% threshold, indicate a contraction in activity.

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Post-release of this data, there was a renewed interest in buying government debt, causing yields to decline. The continued rally in Treasurys hinges on expectations related to monetary policy.

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Federal Reserve Chairman Jerome Powell, in prepared remarks on Friday, countered expectations for a rate cut in the upcoming year. He emphasized that officials remain prepared to tighten policy further if necessary. Interestingly, Powell's remarks contributed to the ongoing rally in Treasury bonds.

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Throughout November, 10- and 30-year yields experienced their most significant monthly declines since August 2019. This decline was fueled by anticipations that easing inflation would prompt the Federal Reserve to retreat from additional rate hikes and potentially reduce borrowing costs in the coming year. The 10-year rate witnessed a drop of 52.5 basis points, while its 30-year counterpart declined by 51.1 basis points over the course of the month.

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BMO Capital Markets strategists Ian Lyngen and Ben Jeffery noted that November's impressive rally in the Treasury market reflected both the Federal Reserve's progress in re-establishing price stability and rebalancing the labor market. They also highlighted the acknowledgment by monetary policymakers that rate hikes for this cycle are likely concluded. The strategists observed that investors swiftly shifted focus to debating the timing of the first Fed cuts, while the Fed's messaging emphasized that lowering policy rates would not be on the agenda for the foreseeable future.